The U.S. Federal Trade Commission’s (FTC) recent decision to ban most non-competition agreements is far from certain, as it appears to be the starting point of a significant legal dispute over the rule’s veracity. The rule, approved on April 23, 2021, following over 26,000 public comments within a year, will become operational 120 days after its Federal Register entry. This allows companies four months to align with its statutes, though immediate legal obstacles are expected. Two opposing commissioners predicated the lawsuits that would likely follow, arguing that the FTC lacks the constitutional and statutory authority to declare a category of contracts, which were legal when the Federal Trade Commission Act was implemented in 1914, null and void. Full text
Not long after the rule was passed, Ryan LLC, a tax services firm, initiated a lawsuit at a Texas federal court to invalidate the rule. This was closely followed by a group of business entities, led by the US Chamber of Commerce, which also filed suit to prevent the final proposed rule from taking effect.
While other legal challenges are likely, they won’t automatically halt the rule’s implementation. The 120-day compliance clock will continue its countdown to implementation unless a court places an injunction that postpones the rule’s effectiveness pending judicial review. Such an injunction is highly likely, and it is doubtful that the final proposed rule will take effect anytime soon, if at all.
The rule mandates businesses to cease entering non-competes with their workers, which include paid or unpaid employees, independent contractors, externs, interns, volunteers, apprentices, or sole proprietors. It also directs businesses to stop enforcing existing non-competes with their workers, except senior executives, and to notify workers, barring senior executives, that their non-competes will not, and cannot legally, be enforced.
There is no obligation to already-existing non-competes related to bona fide business entity sales. It also doesn’t apply to entities without FTC jurisdiction, like non-profit entities, certain banks, credit unions, common carriers, domestic and foreign air carriers, and businesses subject to the Packers and Stockyards Act of 1921, except as provided by 7 U.S.C. § 227(b).
The rule doesn’t extend to other types of restrictive covenants like non-solicitation agreements, no hire agreements, and confidentiality agreements. Existing noncompete disputes are explicitly exempt from its applicability, meaning that if a lawsuit over an alleged violation of an existing noncompete has already been filed by an employer, the rule would not affect that action.
According to the authors Adam Israel of Balch & Bingham and Tripp DeMoss III, the next steps for employers would be to keep an eye on the various legal wrangles and any temporary suspensions issued by the courts. Employers should engage experts to stay abreast of ongoing legal issues and the scope of any temporary stay that might be issued. Despite the FTC’s noncompete ban signalling a significant alteration to the law of fair competition with potential ramifications for businesses of all sizes, it seems unlikely that the rule will have an immediate impact, making it unnecessary for businesses to take immediate steps to begin complying. Full text