The Federal Trade Commission is now facing one less lawsuit over its controversial ban on noncompete agreements – at least temporarily.
Texas-based U.S. District Judge J. Campbell Barker on May 3 issued a stay – essentially, put on hold – a lawsuit filed by the U.S. Chamber of Commerce, which alleges the FTC lacks the legal authority to enact its recently-approved rule broadly outlawing noncompete clauses in the United States.
Barker paused the case because a lawsuit raising near “identical legal theories” against the FTC’s ban was filed a day before the Chamber docketed its suit. As such, Barker temporarily halted the Chamber complaint under the first-to-file doctrine, allowing the suit filed by Texas-based tax services firm Ryan LLC to proceed first.
Barker noted that Ryan LLC is also a member of the Texas Association of Business, a plaintiff in the Chamber case, and that both suits “seek a judgment declaring their rights, an injunction against the FTC enforcing the rule against plaintiffs’ members, and an order vacating and setting aside the rule.”
Background & Education on the Ban
In late April, the Democrat-controlled FTC approved in a 3-2 party-lines vote a final rule that bans noncompetes with all workers, including senior level executives, after the forthcoming effective date. The ruling also voids existing noncompete clauses with workers other than senior executives.
For senior executives, defined as those earning more than $151,164 annually, existing noncompete agreements may remain in place – but new noncompetes with senior executives can’t be enacted. To current or former workers that are subject to noncompetes but not senior executives, employers will have to provide notice that the clauses are unenforceable.
The FTC just banned #noncompete agreements. Opinion in the #promoproducts industry — and across the business world — is divided. What are your thoughts? https://t.co/NDXk2bq9rv
— Chris Ruvo (@ChrisR_ASI) April 23, 2024
The rule technically has not taken effect yet. Enactment is expected to occur 120 days after the rule is published in the Federal Register. Still, depending on how things go in court, it’s possible the effective date could be delayed. A judge could, for example, issue a temporary injunction that prohibits the rule taking effect until the matter is adjudicated – which could mean the rule never goes into play if the FTC’s challengers prevail.
Nonetheless, employment law experts say it would be wise for businesses to prepare as if the noncompete prohibition will indeed soon start being enforced. To help prep businesses and workers, the FTC is hosting an online compliance webinar on Tuesday, May 14, at 11 a.m. ET. The webinar will provide an overview of the FTC’s final rule banning noncompetes, including information on how to comply with the rule after its effective date. The webinar is free and open to the public.
“The FTC invites members of the public to submit questions ahead of the webinar,” the FTC said. Questions can be submitted by email to [email protected].
In effect, a noncompete clause prohibits one party (usually a worker) from taking another job or starting a business in a similar profession and/or region that competes against another party (usually an employer), often for a set period of time. The ban has divided opinion in the promotional products market.
“I think it should be illegal to keep someone from earning a living just because they might compete with you,” Nancy Whitley, owner of California-based distributorship Conextions (asi/166554), has told ASI Media. “If you are hired by someone who is a ‘hell on wheels’ employer and you have to leave just to save your sanity, and you’ve signed a noncompete agreement, and what you are doing is the only thing you know how to do…then you are in a real slavery-type bind.”
“While I understand the concept of not limiting someone’s ability to go and make money, what bothers me about not having noncompetes is that it theoretically allows someone to come and learn everything from your business, then go and start their own business down the street doing the same thing and going after your customers that they know buy the type of products that now you and your former employee sell,” Tim Holliday, co-owner of Florida-based distributor Children’s World Uniform Supply (asi/161711), has said. “As with most things, I think a middle ground would be good, like allowing noncompetes to stand for one year.”
Companies can still use non-disclosure clauses and non-solicitation agreements with workers, but some proponents of noncompetes say those options aren’t as effective at protecting businesses and are more difficult to enforce.
