A federal judge on Wednesday upheld the first lawsuit challenging the Federal Trade Commission's non-compete measures that are set to take effect in September.
Judge Ada Brown granted the injunction requested by several of the plaintiffs, saying the ban cannot be enforced against them until a final judgment is made.
But while the ruling is tentative, she said the FTC lacks “substantial rulemaking authority” regarding unfair competitive practices and the plaintiffs' challenges are “substantially likely to succeed.”
Judge Brown of the U.S. District Court for the Northern District of Texas said he plans to issue a final ruling by the end of August.
“The Commission maintains its clear authority, supported by statute and case law, to issue this rule,” said FTC spokesman Douglas Farrar, adding that the agency will “continue to fight” non-compete clauses to promote worker mobility and economic growth.
In April, tax firm Ryan LLC filed suit to block the near-total ban on non-competes just hours after the FTC voted 3-2 to adopt the rule. The U.S. Chamber of Commerce, the Business Roundtable and two Texas business groups subsequently joined the suit as plaintiffs.
The FTC estimates that banning non-compete agreements that prevent workers from changing jobs within an industry could increase worker income by at least $400 billion over the next decade. The agreements affect roughly one in five U.S. workers, or about 30 million people, according to the FTC, which also oversees antitrust and consumer protection issues.
“When non-compete clauses prevent people from working in the places where they can be most productive, that's a loss for the economy,” Aviv Nebo, director of the FTC's Bureau of Economics, said at a conference in April.
Business groups argue the ban would limit their ability to protect trade secrets and confidential information. The Chamber of Commerce and other groups argue the FTC lacks constitutional and statutory authority to adopt the proposed rules, which Ryan LLC calls “arbitrary, capricious and otherwise unlawful.” A separate lawsuit seeking to block the rules is pending in federal court in Pennsylvania.
But the five-member committee's three Democrats argue that under the 1914 law that created the FTC, the commission can legally make rules governing unfair competitive practices. Their position has bipartisan support. In a brief filed in the Texas lawsuit, Republican Rep. Matt Gaetz of Florida argued that non-competes are “fully within the scope” of the rulemaking power Congress gave the commission.
The Supreme Court's decision last week to limit federal agencies' broad regulatory powers could raise legal hurdles for them.
As litigation over non-compete clauses drags on, some lawyers are already advising employers to rely more on different agreements to protect trade secrets and business interests.
In a blog post after the FTC adopted the non-compete law, law firm Winston & Strawn suggested employers adopt alternative measures, such as tightly tailored non-disclosure agreements or requiring employees to reimburse the company for training costs if they leave before a certain period of time (known as a training reimbursement agreement clause, or TRAP).
“There's been a growing focus on these additional protections,” said Kevin Goldstein, an antitrust partner at the law firm Winston & Strawn.
But such agreements are also coming under increased scrutiny. The Commission's final rule includes “de facto non-compete clauses” that, even though they are not labeled as non-competes, effectively prohibit workers from changing jobs within an industry. And beyond the FTC's rules, employers are looking to the evolving landscape of state and federal regulation of such agreements, including non-disclosure agreements.
While the Commission's vote to ban non-compete clauses has garnered the most attention, there has been a simultaneous increase in activity by other federal agencies and state legislatures opposing agreements that limit worker mobility.
“There's growing hostility toward these agreements across the country,” said Christine Bester Townsend, co-chair of the Unfair Competition and Trade Secrets Practice Group at the law firm Ogletree Deakins.
Last month, a National Labor Relations Board judge ruled for the first time that non-compete clauses are unfair labor practices as part of a ruling in a wrongful termination case. The judge also broke new ground by banning non-solicitation clauses that restrict customers or former employers from soliciting employees. The judge argued that both types of agreements can have a chilling effect on protected activities, including labor organizing.
The ruling follows a memo issued last year by Jennifer Abruzzo, the Labor Board's general counsel, in which she made clear her view that non-compete clauses in employment agreements violate the National Labor Relations Act, except in limited circumstances.
“Getting a guidance memo from the general counsel is an important and meaningful thing,” said Jonathan F. Harris, an associate professor of contract and employment law at Loyola Law School in Los Angeles, “but seeing the NLRB adjudicating party agree with her is another thing.”
Harris said these types of restrictive contracts tend to discourage workers from unionizing, “because if you get fired for unionizing, the impact is even greater if you can't get another job afterward.”
Other federal agencies have joined in, taking aim at a range of employment regulations that they say unfairly restrict workers, part of a government-wide effort by the Biden administration to tackle what they see as anticompetitive restrictions on worker mobility.
For example, the Consumer Financial Protection Bureau released a report last summer on the dangers of provisions that require workers to repay training costs if they leave before a certain period of time.
This isn't just a federal effort: state governments are also stepping in to promote worker mobility, a trend that began before the FTC voted to ban non-compete clauses in April but has since gained momentum.
Last month, the Rhode Island state legislature passed a bill banning non-compete clauses, joining Minnesota, California, Oklahoma and North Dakota, and dozens of other states have partial restrictions in place.
“Minnesota isn't in a big hole,” Pat Garofalo, director of state and local policy at the Project on American Economic Freedom, a progressive think tank, said of the state's sweeping non-compete law that went into effect last year. “Once one domino falls, others follow and others fall.”
State laws may also be more resistant to challenge than federal laws.
“The Legislature obviously has a strong interest in enacting these rules right now,” Garofalo said.