May 30, 2024 - On April 23rd the Federal Trade Commission (“FTC”) approved a sweeping final rule (the “Rule”) that bans noncompete clauses between employers and workers. On the same day, Ryan LLC, a tax services firm brought the first of a series of lawsuits against the FTC arguing that the agency exceeded its statutory authority in promulgating the rule. The following day, the U.S. Chamber of Commerce (the “Chamber”) filed a suit. The Rule, if it survives the legal challenges, would have significant implications for the financial services industry, including the loan market, where non-competes and “garden leave” limitations are common. This article will briefly outline the Rule and the issues being litigated. For a more comprehensive review, please see this helpful memo from Skadden.
What is a noncompete clause under the Rule? Any term or condition of employment that “prohibits,” “penalizes” or “functions to prevent” a worker from seeking or accepting work or operating a business in the U.S. after the conclusion of employment.
What are the salient features of the Rule? The Rule(i) prohibits new noncompete clauses between employers and workers on a go-forward basis; (ii) renders most existing noncompete clauses unenforceable (with the exception of those applying to “senior executives”); (iii) requires employers to provide notice to employees subject to prohibited noncompete clauses that they will not be enforced; and (iv) establishes narrow exceptions for worker noncompete clauses entered into in as part of a bona fide “sale of business,” as well as for existing causes of action under worker noncompetes that accrued prior to the issuance of the final rule.
State Law Preemption. The Rule acts as a “floor” on noncompete clauses vis-a-vis state law. So, it would preempt state laws that are inconsistent with the Rule but not those that offer greater protection.
Litigation Against the FTC. As reported by the Washington Post, the Chamber argues that the FTC lacks the authority to issue such a sweeping and consequential rule, and it is asking the court to overturn it. They note that the Chamber has opposed the rule since it was proposed arguing that it would hurt businesses’ ability to protect proprietary information and reduce their incentive to invest in workers to prevent them from jumping to a rival employer. The Chamber lawsuit argues that “The Commission’s astounding assertion of power breaks with centuries of state and federal law and rests on novel claims of authority by the Commission. As reported by Reuters, the Texas court hearing the Chamber’s lawsuit stayed the proceeding on the basis of the “first to file” doctrine, noting that a very similar case was brought a day earlier in a different Texas district court by Ryan LLC. The cases were subsequently consolidated in the Northern District of Texas.
What’s next? Unless the court intervenes, the Rule is slated to go into effect on September 4th, 2024, 120 days after its May 7th publication in the Federal Register. In the meantime, the plaintiffs are moving for a stay of the effective date and a preliminary injunction and the FTC is opposing those motions. We will continue to monitor the litigation as it moves forward.
