Within hours of the Federal Trade Commission's (FTC) publication of a proposed new rule that would ban many noncompete agreements, the U.S. Chamber of Commerce and other business groups' lawsuits are likely to delay or derail implementation of the new rule. Eventually, a Supreme Court decision may strike down the issue under what it terms the major questions doctrine. The first decision, in Ryan LLC v. FTC in the Northern District of Texas, is expected on July 3, 2024.
On June 13, 2024, Judge Ada E. Brown of the Northern District of Texas Dallas Division, determined that a hearing on the plaintiff's request for injunctive relief was not necessary. A second lawsuit, Chamber of Commerce v. FTC, filed in the Eastern District of Texas, was stayed pending the Northern District's decision on the Ryan claims. The FTC is also facing a challenge in the Eastern District of Pennsylvania by a Pennsylvania-based tree trimming company. Some observers see an attempt to create a split between federal circuits, which could be an avenue to Supreme Court review. Here we go. Issue is joined, as lawyers say.
Check Your Employment Contracts to Assess the Validity of Noncompete Agreements Under the FTC Noncompete Rule
Cautious employers andemployees might do well to regard their existing noncompete agreements as valid. Employers may also want to evaluate whether those that limit the actions of lower-paid employees demonstrably serve an important business interest. Employees with noncompete clauses in their employment contracts or as separate documents might wish to evaluate them in the context of their overall careers. Is career growth being stifled? Are managers or coworkers subduing your ideas? Some believe noncompete agreements limit the growth of individuals, industries, and companies, which is why the FTC promulgated its new noncompete rule.
Proposed FTC Noncompete Rule and Workforce Dynamics
On April 23, 2024, the FTC issued a proposed final rule rooted in a finding that it was an unfair method of competition — and therefore a violation of section 5 of the Federal Trade Commission Act — for persons to enter into noncompete agreements with workers on or after the final rule's effective date. That date was then expected to be September 4, 2024. That proposed rule banned all NEW noncompete agreements as of September 4, 2024.
New Worker Definitions Within the Proposed FTC Noncompete Rule
With respect to existing agreements, the proposed rule distinguishes between senior executives and other workers. The FTC defines senior executives as those earning more than $151,164 annually who are in a policy-making position. For senior executives, existing noncompete agreements could remain in force after the September 4, 2024, effective date.
For everyone else, the FTC's rule is expansive. Worker is defined to include independent contractors, externs, interns, volunteers, apprentices, and sole proprietors providing services. The rule also broadly defines noncompete clauses to mean any other clauses that penalize a worker for or function to prevent a worker from competing. The rule also prohibits clauses that operate as de facto noncompetes, including overly broad non-disclosure agreements, non-solicitation clauses, and training and repayment agreement provisions. In addition, any provision offered in exchange for the prohibited agreement, such as severance pay, would remain intact. The proposed rule would not affect:
- banks, savings and loans, and federal credit unions;
- common ground carriers and air carriers; and
- members of the livestock, meat, and poultry industries who are otherwise
Business Exceptions and Business Ownership Strategies
The proposed rule also contains a sale-of-business exception for individuals with at least a 25 percent ownership stake in the business. It is not yet clear how the proposed rule would affect employee benefit plans or consulting agreements that contain claw back clauses requiring repayment of previously paid compensation in the event of a non-compete breach.
The New FTC Noncompete Rule Offers Potential Good News for Workers and Companies
The FTC anticipates that implementation of its Proposed Final Rule would:
- Reduce health care costs by $74-$194 billion over the next ten years;
- Cause the creation of more than 8,500 additional new businesses each year;
- Foster innovation, as measured by an average of 17,000 to 29,000 more patents
- Increase worker earnings by as much as $400-$488 billion over the same period.
Predictions from Scholars on the Proposed New FTC Noncompete Rule
In an article published by the American Bar Association, many predict that under the current court climate, challenges have a good chance for decisions that may strike down of the new rule. The plaintiffs argue that:
- FTC's authority over non-compete clauses does not exist. The FTC lacks authority to promulgate such a rule. It has no rulemaking authority on this issue, especially because Congress has declined to act on the matter.
- It fails the newly adopted major questions doctrine of the current Supreme Court.
- The Supreme Court's stance on noncomplete agreements.
- The rule is arbitrary and capricious.
Noncompete Agreements in Today's American Economy and the Workforce Mobility Act of 2023
Instead of looking at this from the top down, let us view it from the bottom up. Does a Jimmy John's sandwich maker or delivery person need to be restrained from taking a job at Subway, or another job to protect the corporate owners? Does a threat exist?
In February 2023, a bipartisan group of senators re-introduced a bill called the Workforce Mobility Act of 2023. This legislation would largely ban the use of noncompete clauses in employment contracts nationwide as a matter of federal law. It went nowhere. Nonetheless, does this initiative anticipate a Supreme Court move to strike down the proposed rule if it becomes final?
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