FTC Appeals Noncompete Ruling; Does It Have a Ghost of a Chance?

The latter part of October is typically a time to dust off the dead … and the undead.

The U.S. Federal Trade Commission (FTC) has kept with the Halloween season and unearthed the zombie that is the ban on noncompete agreements.

In a move late in the day on Friday, Oct. 18, the FTC appealed a federal court ruling that effectively killed (or did it?) the agency’s proposed ban on such pacts for most American employers. The agency did not provide a formal comment or press release related to its appeal.

The filing to the U.S. Court of Appeals for the 5th Circuit challenged an Aug. 20 decision by the U.S. District Court for the Northern District of Texas in the case Ryan LLC v. Federal Trade Commission.

The FTC final rule on noncompete agreements had been approved by the agency on April 23 and had a Sept. 4 effective date. The ban would have covered all existing and new noncompete agreements for U.S. workers, with exceptions for those in certain industries (airlines, financial services and nonprofits). In addition, it would have prohibited covered employers from creating new noncompete pacts with “senior executives,” defined as employees who earn more than $151,164 annually and are in a “policymaking position.”

In the August Ryan verdict, Judge Ada Brown sided with the plaintiff (a tax software and services firm) and barred nationwide implementation of the FTC final rule by determining that:

The agency does not have the statutory authority to engage in competition-related rulemaking, and
The noncompete rule is “arbitrary” and “capricious.”

In Ryan and in two related cases (ATS Tree Services LLC v. FTC and Properties of the Villages, Inc. v. FTC), the defendants had pointed to Section 6 of the Federal Trade Commission Act, which the agency says grants it “additional powers to support the adjudicatory scheme” — in effect, enabling it to issue legislative rules (that have the force of law) “to prevent unfair methods of competition.”

The FTC estimates roughly 30 million Americans — or 1 in 5 workers — are subject to noncompete agreements and related employment contracts and believes eliminating them would bolster opportunities and increase wages. Opponents, including the U.S. Chamber of Commerce, the Business Roundtable and the Society for Human Resource Management, have categorized the rule as government micromanagement of employers’ business decisions.

Will the Noncompete Ban Come Back to Life?

Legal experts have called Brown’s decision in Ryan a logical extenuation of the Supreme Court’s June 28 ruling in two adjoined cases (Loper Bright Enterprises v. Raimondo and Relentless v. Department of Commerce) that, for all intents and purposes, thwarted the rulemaking power displayed by the FTC in the noncompete final rule. The Loper Bright and Relentless decisions voided the so-called Chevron doctrine, a decades-old standard that required courts to give substantial deference to agencies like the FTC.

The chances of the FTC overturning the Ryan verdict and lifting the injunction on the noncompete ban appear to be as slim as a starving zombie. The bar set by the Supreme Court in late June doesn’t help the FTC’s case. Neither does the agency’s appeals filing with the 5th Circuit, given that court’s conservative bent and opposition in recent years to President Joe Biden’s policies on federal regulatory power, guns, abortion and social media regulation.

Law website JD Supra stated it expects the Fifth Circuit to take “at least six months” before issuing a decision on the appeal.

How Can Employers Protect Themselves?

Whether or not the appeals filing has any teeth, legal experts warn employers against being bitten by complacence when it comes to noncompete agreements and restrictive covenants.

Action and momentum continue to occur at the state level. The legislation landscape shows:

Seven states (Arizona, Connecticut, Georgia, Kentucky, Missouri, New York and Tennessee) recently proposed bills to restrict (or further restrict) noncompete clauses.
Three states (Iowa, Louisiana and Pennsylvania) have noncompete laws that will take effect in the near future.
Twenty-five states (plus the District of Columbia) have laws in effect that limit noncompete clauses in some form: California, Colorado, Connecticut, Delaware, Florida, Illinois, Indiana, Kentucky, Maine, Maryland, Massachusetts, Montana, New Hampshire, New Jersey, New Mexico, North Dakota, Oklahoma, Oregon, Rhode Island, South Dakota, Tennessee, Texas, Virginia, Washington and West Virginia.

“States across the country continue to pass new legislation further restricting — and, in some cases, banning — the use of noncompete clauses,” said James Barrett, a lawyer at Ogletree Deakins. “In particular, companies using multi-state agreements should have those agreements reviewed annually, at a minimum, to ensure compliance with applicable state law.”

Additionally, legal experts advise HR professionals to:

Fully examine all of their restrictive employee covenants. Organizations should not view noncompetition agreements, confidentiality agreements and nonsolicitation agreements as “one and done” forms that apply to all employees and never need updating. According to Pamela Ploor, an attorney at Stafford Rosenbaum LLP, the agreements with the best chance of court enforcement are those that experienced legal counsel has recently reviewed and updated.
Take other measures to protect confidential information and trade secrets. According to the Smith Anderson law firm, that includes limiting physical and electronic access based on need-to-know, having confidentiality and security policies, and using onboarding and offboarding processes to train and remind workers about confidentiality, noncompete, nonsolicit and return-of-property obligations.

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