Court blocks enforcement of FTC ban on noncompetes

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The federal rule banning noncompete clauses will go on hold, at least temporarily, while government regulators and noncompete opponents spar in court.

A federal judge this month issued a preliminary injunction that stops the Federal Trade Commission (FTC) from implementing or enforcing the noncompete rule approved in April and scheduled to take effect on Sept. 4. There is more legal action to come: The court intends to issue a ruling by Aug. 30, and in a separate lawsuit involving noncompetes, another federal court hearing was scheduled for July 10.

“The court’s decision is an important step toward invalidating a rule that burdens not only Ryan, but also Ryan’s clients, and multitudes of employers and employees across America,” said John Smith, chief legal officer and general counsel of Ryan LLC, the company that sued to stop the noncompete ban.

“We’re grateful that the U.S. Chamber of Commerce and Texas Association of Business joined our case shortly after we filed it,” Smith said in a news release earlier this month. “We appreciate the many organizations – which together represent a vast swath of the American economy – that filed briefs supporting Ryan’s position.”

Noncompetes in Texas

In the court case with the ruling, Ryan LLC, a global tax service and software provider based in Dallas, Texas, sued the FTC to halt the ban on noncompete agreements, scheduled to take effect Sept. 4.

U.S. District Court Judge Ada Brown concluded:

• The FTC exceeded it statutory authority in banning noncompetes.
• The FTC ban is “arbitrary and capricious because it is unreasonably overbroad without a reasonable explanation.” While at least 46 states regulate noncompete agreements, Brown noted none have a noncompete rule as broad as the FTC’s “sweeping prohibition.”
• The ban will cause irreparable financial harm for Ryan to comply with it.
• A preliminary injunction “serves the public interest by maintaining the status quo and preventing the substantial economic impact of the rule, while simultaneously inflicting no harm on the FTC.”

However, the court ruled Ryan LLC did not supply evidence supporting universal or nationwide relief, so the ruling applies to Ryan LLC and intervening plaintiffs U.S. Chamber of Commerce, Business Roundtable, Texas Association of Business, and the Longview Chamber of Commerce.

Legal victory

While the injunction is preliminary for now, the plaintiffs said the ruling was a legal victory against the FTC.

“This ruling is a big win in the Chamber’s fight against government micromanagement of business decisions,” Daryl Joseffer, U.S. Chamber of Commerce executive vice president and chief counsel. “The FTC’s blanket ban on noncompetes is an unlawful power grab that defies the agency’s constitutional and statutory authority and sets a dangerous precedent where the government knows better than the markets. The U.S. Chamber will continue to hold the FTC accountable in court.”

Another case

The Ryan LLC lawsuit was filed in the Northern District of Texas. In the Eastern District of Pennsylvania, a federal judge scheduled a motion hearing in another lawsuit filed by ATS Tree Services LLC, a small business based in Perkasie, Pennsylvania, working with the Pacific Legal Foundation.

That company “uses reasonable non-compete agreements to ensure that it can provide its employees with necessary and valuable specialized training while minimizing the risk that employees will leave and immediately use that specialized training and ATS’s confidential information to benefit a competitor,” said its lawsuit. The business and the employees both benefit, with staff gaining new skills and ATS hiring workers committed to learning without fear they immediately will take specialized skills to a competitor, the complaint said.

But “the FTC’s noncompete agreement ban is unlawful, senseless, and itself unfair,” the complaint said.

“It treats employees as though they are not competent to understand their own interests and powerless to control their own destinies,” the lawsuit said. “It treats employers as behaving coercively and exploitatively, rather than negotiating with their employees in good faith. It usurps the authority of states to establish their own laws concerning contracts. And it ignores that only Congress can make the law under our constitutional system.”

Effects on health care

In April, the FTC commissioners met publicly online and cited health care specifically among reasons to support a ban on noncompetes. At least one commissioner noted FTC jurisdiction includes for-profit businesses, but the new rule would not cover physicians, other clinicians and staff in nonprofit hospitals and health systems.

While some physicians noted benefits of noncompete clauses for their practices, doctors and hospital leaders generally split on the issue. Physicians have argued the noncompete clauses hurt their ability to make a living by limiting where and when they could practice. Hospital leadership countered that noncompetes help patient care while protecting investments that hospitals make to recruit physicians and executives, and to train staff.

The FTC estimated noncompete agreements affect 18% of the U.S. workforce, or about 30 million people. The Commission argued banning noncompetes will spur more innovation, more business start-ups and higher earnings for workers.