In a decision that could have major implications nationwide, a federal judge has put the Federal Trade Commission’s controversial new rule restricting the use of non-compete agreements on hold, at least temporarily.

Judge Ada E. Brown of the U.S. District Court for the Northern District of Texas granted a preliminary injunction on July 3rd which blocks the FTC‘s rule from taking effect for a group of plaintiffs, including major business associations like the U.S. Chamber of Commerce and the Business Roundtable.

While the injunction technically only applies to the plaintiffs in the case, experts say the judge’s reasoning suggests the entire rule is on shaky legal ground and could eventually be struck down completely.

That would be a big win for employers across the country, who have argued the FTC lacks the legal authority to implement such a sweeping ban on non-competes. But it remains to be seen whether the rule will survive ongoing legal challenges.

The Controversial Rule

Finalized by the FTC in March after years of deliberation and debate, the new rule was scheduled to take effect on September 4th. It would ban the use of non-compete clauses for most workers in the U.S., with limited exceptions.

Specifically, it prohibits employers from:

• Entering into or attempting to enter into a non-compete with any worker making less than $151,164 per year
• Entering into or attempting to enter into a non-compete with an independent contractor or any worker who does not have supervisory or management duties
• Retaliating against a worker for failing to sign or comply with a non-compete

The rule does allow non-competes for high-level executives making over $151,164, employees who have access to trade secrets, and certain workers in specific industries like air travel and financial services.

Employers would also be required to rescind existing non-competes and notify current and former employees the agreements are no longer in effect

The Legal Challenge

The FTC justified its authority to issue such a broad rule by pointing to its mandate to protect fair competition under the Federal Trade Commission Act. But business groups didn’t buy that argument.

Within days of the final rule being published, multiple lawsuits were filed challenging its legality. Opponents argued the FTC had overstepped its authority and ignored important evidence related to the business impacts of banning non-competes.

Judge Brown’s July 3rd decision sided with the challengers, at least for now. Her main conclusions included:

• The FTC likely violated administrative law and exceeded its statutory powers with such a sweeping ban.
• Congress never gave the FTC unlimited authority over employment matters.
• By imposing a “one-size-fits-all approach,” the rule is likely overly broad and arbitrary.
• The FTC failed to sufficiently analyze alternatives or more targeted regulations.

What This Means for Employers

While Judge Brown’s preliminary injunction technically only stops the rule from taking effect for the plaintiffs in the case, most experts agree it signals bad news for the rule overall.

By deciding the challengers have a “substantial likelihood” of prevailing on the merits, the judge made clear she thinks their legal arguments have real weight.

Attorneys monitoring the case say terms like “life support” are now being used when talking about the FTC rule’s survival chances. It remains to be seen whether Judge Brown or other courts will strike down the rule completely.

In the meantime, the judge said she will issue a final judgement on the rule’s legality by August 30th. Other similar cases are still pending as well. So, employers should stay tuned for new developments in the weeks ahead.

For now, most advise sticking with the status quo on non-competes rather than racing to modify contracts and policies. Clarity should come soon on whether this controversial FTC rule lives or dies.

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Copyright © 2024 Smarts Publishing. This is not intended to be exhaustive nor should any discussion or opinions be construed as legal advice. Readers should contact legal counsel or an insurance professional for appropriate advice.