An attempt by the Federal Trade Commission (FTC) to create and enforce national labor law came to a screeching halt when a federal court stayed the commission’s attempt to ban employers from imposing postemployment non-compete agreements for employees and independent contractors just days before it was to go into effect.
On Aug. 20, Judge Ada Brown of the U.S. District Court for the Northern District of Texas granted summary judgment in favor of those who had sued to prevent the FTC from enforcing its rule banning almost all non-compete clauses that are contained in employer agreements, which had been scheduled to go into effect on Sept. 4.
Although other employers also had asked other courts also around the country to stay the FTC’s enforcement of the non-compete ban, the results up to that point had been mixed, and where injunctions had been granted they were geographically limited to certain states while Judge Brown’s decision applies nationwide.
In advance of the ban’s deadline, many attorneys had advised their employer clients to institute new written company policies withdrawing and prohibiting the imposition of non-compete agreements on their workforce. This advice carried even more weight because the federal rule was to be applied retroactively once it went into effect.
Although the trend of city and state governments banning non-compete agreements for employees has been sweeping the nation in recent years, the FTC is an odd choice of a vessel to promote and enforce this particular legal concept. The independent agency was created by Congress and charged with enforcing civil federal antitrust laws (the U.S. Department of Justice prosecutes violations of federal criminal antitrust statutes) and also engages in consumer protection initiatives.
But since 2021 Lina Khan, the Biden-appointed Chair, has spearheaded an expansion of the commission’s brief to include what are traditionally considered labor laws that lie outside the FTC’s jurisdiction. For this reason, it was not surprising when employers and employer groups filed a raft of lawsuits challenging the legality of the FTC non-compete rule after it became final earlier this year.
This isn’t Khan’s first foray into labor law. Last year the FTC joined the Employment Opportunity Commission, Consumer Financial Protection Bureau and Department of Justice’s Civil Rights Division to announce they would work together to ensure artificial intelligence does not violate individual rights and regulatory compliance in regard to possible violations of civil rights, equal employment opportunity, fair competition and consumer protection.
The FTC Forges Ahead
Non-compete agreements have become a hot issue in employment law. So far, 25 states have imposed different legal restrictions on employers who require their workers to sign non-compete agreements, with California, Minnesota, North Dakota and Oklahoma banning them almost completely.
Khan has argued that the FTC should have a direct role in regulating labor practices because they have a direct impact on competition and thus fall under the commission’s purview. The commission had argued that the ban on non-competes is necessary to spur economic growth and to protect workers. The agency estimated that 30 million American workers would be impacted if non-competes become illegal.
“The practical effect of the court’s decision is that employers can maintain the status quo—meaning they can use non-competes to the extent they are permitted under state law,” according to attorneys for the Venable law firm. “However, recommendations made to employers in advance of the rule going into effect remain prudent, and employers operating in multiple states will continue to confront a patchwork of laws limiting the use of non-competes.”
It also is expected that the FTC will not back down and is expected to appeal the Texas judge’s decision to federal appeals court. In the end, it seems quite likely that the case will eventually reach the U.S. Supreme Court, which will ultimately decide the fate of the FTC’s non-compete ban. Given the high court’s recent decision overturning the Chevron guidance granting federal agencies broad latitude in interpreting the law, the ban could very well be overturned.
Although the commission currently cannot enforce the non-compete rule, it still has the authority to investigate and bring individual enforcement actions against non-compete clauses that it determines violate the FTC Act, point out attorneys for the law firm of Covington & Burling. In fact, last year the commission entered into consent decrees with three companies over their deployment of non-compete agreements.
“As a result, companies may still find it beneficial to take stock of their existing non-compete agreements, including their reasonableness and business justifications, and to consider seeking legal advice on their legality and enforceability under state and federal law,” the Covington & Burling attorneys recommend.
