July 8, 2024   

Not so Fast: FTC's Non-Compete Ban Faces Legal Roadblock

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Preliminary injunction issued, final ruling expected by August 30

 

The Federal Trade Commission's ambitious attempt to ban most non-compete clauses in employment agreements nationwide has hit a significant roadblock, highlighting the complex legal landscape surrounding workplace regulations.

On April 23, 2024, the FTC passed a final rule prohibiting most non-compete clauses, citing their unfair impact on competition. However, the agency's authority to implement such a sweeping change has been challenged in federal court.

In a notable development on July 3, 2024, the U.S. District Court for the Northern District of Texas granted a preliminary injunction in the case of Ryan LLC v. Federal Trade Commission. The court's decision temporarily blocks the FTC from enforcing the rule against the plaintiffs and plaintiff-intervenors, which include Ryan LLC, the U.S. Chamber of Commerce, and several business associations.

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Judge Ada Brown, who issued the ruling, stated that the court "intends to rule on the ultimate merits of this action on or before August 30, 2024." This timeline is significant, as the FTC's rule was set to take effect on September 4, 2024.

The court's decision raises doubts about the FTC's statutory authority to issue such a rule. In her order, Judge Brown noted that while "the FTC has some authority to promulgate rules to preclude unfair methods of competition," she found that "the FTC lacks authority to create substantive rules through this method."

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Above:  A sample noncompete clause from a past Ecosense agreement

Another Ruling May Also Dilute FTC Authority

Legal experts from the New York law firm, White & Case, suggest that the recent Supreme Court decision in Loper Bright Enterprises v. Raimondo, which overturned the longstanding principle of "Chevron deference," may further complicate the FTC's legal position. This ruling limits federal agencies' ability to interpret their own regulatory power broadly.

Despite the setback, FTC spokesperson Douglas Farrar defended the agency's position, stating, "The FTC stands by our clear authority, supported by statute and precedent, to issue this rule," according to CNN.

The U.S. Chamber of Commerce hailed the court's decision. Daryl Joseffer, the Chamber's chief counsel, called the FTC's action "an unlawful power grab" and vowed to continue challenging the rule in court, CNN reported.

 

Looking Ahead

While the preliminary injunction currently applies only to the specific parties involved in the Ryan LLC case, many legal observers anticipate that a final ruling could have nationwide implications. The court has left open the possibility of broader injunctive relief pending further evidence and argumentation.

The FTC estimates that approximately 30 million U.S. workers, or one in five, are currently bound by non-compete clauses. The agency argues that these agreements restrict job mobility, suppress wages, and hinder innovation and entrepreneurship.

As the deadline for a final ruling approaches, businesses and workers across the country are closely watching the case, which could have far-reaching consequences for employment practices and labor market dynamics in the United States.

 

 

 




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