(Bloomberg) -- For decades, noncompete employment agreements have prevented all sorts of workers — doctors, engineers, even hair stylists — from easily switching jobs. That was set to change in early September after the US Federal Trade Commission approved a near-total ban on such provisions, but on Aug. 20 a federal judge blocked the rule, saying the FTC lacked the authority to enact it.
The Texas judge sided with business groups like the US Chamber of Commerce, which had sued to halt the ban, and dealt a significant blow to the FTC, which said it intends to appeal. For now, companies that were concerned about having to tear up existing noncompetes “can breathe a sigh of relief,” said Scott Humphrey, an attorney at Benesch, a law firm that represents employers.
Was this expected?
Yes. In July, Dallas district judge Ada E. Brown temporarily blocked the ban, and her decision this week makes that injunction permanent and nationwide in scope. Brown didn’t mince words in her 27-page ruling, saying that the FTC’s proposed rule was “arbitrary and capricious” and would cause “irreparable harm.” Supporters of the FTC cried foul: “Without reform, employers will continue to cause irreparable harm to their employees by paying them less, blocking their ability to pursue their careers elsewhere, and throttling entrepreneurship,” said Matt Marx, a professor at Cornell University’s SC Johnson College of Business who has researched noncompetes for two decades.
The noncompete ban always faced an uphill climb, as it represented only the second time in the FTC’s 100-plus years of existence that it adopted a rule designed to confront unfair competition. A set of recent decisions from the Supreme Court reining in agency power also demonstrated the stark challenge the FTC faced.
“This is the outcome we have predicted since the FTC first proposed the rule,” said Erik Weibust, a trade secrets attorney at Epstein Becker Green. “We expect it to be upheld on appeal, ultimately by the US Supreme Court.”
What will come of any appeals?
In a statement, FTC spokesperson Victoria Graham said the agency is “seriously considering a potential appeal.” But that could wind up in the lap of the conservative US 5th Circuit Court of Appeals in New Orleans, a favorite for conservative opponents of President Joe Biden’s policies related to federal regulatory power, guns and abortion. If the block on noncompetes gets to the Supreme Court, “the expectation is that SCOTUS will limit enforcement or throw it out entirely,” said Stefanie Camfield, director of HR services at Engage PEO, an human-resources outsourcing firm. “I’d expect them to throw it out entirely.”
The case in Dallas is actually one of three lawsuits that challenged the FTC’s non-compete rule. The others are pending in Florida and Pennsylvania, with one judge initially siding with the FTC and the other against. Neither of those suits has yet reached a final determination on the FTC’s rule-making authority.
Does this mean noncompetes are allowed everywhere?
Not at all. Four states — California, Minnesota, Oklahoma and North Dakota — have banned nearly all noncompetes, and most states have some restrictions in effect, typically around salary thresholds, the length of such agreements, their geographic scope or the professions they can apply to. (Iowa and Kentucky recently enacted exemptions for health-care workers.) If a federal ban gets shelved, even more states could move forward and set their own limits. Noncompetes affect roughly one in five American workers, or around 30 million people, according to the FTC.
“I think this decision will continue to catalyze state interest in restricting noncompetes,” said Evan Starr, an associate professor at the University of Maryland’s business school, whose research focuses on restrictive employment agreements. “We will see more bans on noncompetes being proposed — if not complete bans then bans for at least low- and middle-income workers.”
New York Governor Kathy Hochul, for example, in December vetoed a bill that would have banned the use of noncompete agreements in the state after intense lobbying from Wall Street and other industries. If the FTC’s ban gets killed, “I would expect that one to pick up steam again,” Camfield said.
What should companies do now?
In recent months, companies weren’t sure whether or not to inform employees that their noncompete agreements were null and void. That’s because the two other legal challenges to the rule yielded two conflicting decisions — one saying the FTC likely has the authority to issue the ban and the other saying it likely doesn’t.
Under the proposed rule, existing noncompetes that applied to lower- and mid-level workers would have been voided, while noncompetes for senior executives in a “policymaking position” who earn more than $151,164 a year could have remained.
While the court battles played out, Camfield advised her clients to have plans in place to inform employees about the status of their noncompetes, but to hold off on actually telling them. “That’s because once you issue that, it’s done,” she said. “If you want to call it back, you need to work with your legal counsel. So employers have held off.”
Employers have also considered what other legal means they could use to protect trade secrets and other sensitive information. Nondisclosure and non-solicitation agreements can help keep proprietary information secure, but companies prefer noncompetes, Camfield said, as they’re the one thing that can totally prevent an employee from working with a competitor.
A big hurdle, of course, is simply determining what knowledge is considered worth protecting. “This is all very confusing for most of us,” Roxanne Bras Petraeus, co-founder and CEO of workplace-training platform Ethena, wrote in a LinkedIn post. “I’ll bet if you took the average Jane and asked them to distinguish between trade secrets, IP, confidential information and the knowledge they’ve acquired that they can bring to competitors, you’d get a ????.”
The best way to make sure that employees don’t leave for a competitor, she said by email, is to “create a work environment that makes your employees want to stay.”
What does this ruling say about the future of work?
The FTC’s proposed ban came amid new Labor Department regulations that expanded overtime pay eligibility, allowing roughly four million workers to take home more money when they work more than 40 hours a week. Unions and other worker advocacy groups embraced both developments, while business groups have railed against them, mapping out legal challenges.
What a difference a few months makes. Now, the noncompete ban has been blocked, employers have significantly slowed hiring, and raises are likely to get dialed back next year. All of that has tilted the balance of power between bosses and staff comfortably back in favor of management.
Still, the fierce debate over the proposed ban — the FTC received more than 20,000 public comments about it — has raised awareness of the issue among employees and employers. “People know about noncompetes now,” said Cornell’s Marx. “Whatever happens, it makes workers aware. Everyone is talking about it.”
--With assistance from Leah Nylen.
©2024 Bloomberg L.P.