Federal lawsuit filed against FTC over ban on noncompete agreements, which may delay enforcement

The FTC rule isn't set to go into effect until 120 days from the day it is published in the Federal Register.

ByJeanne Sahadi, CNN, CNNWire
Friday, April 26, 2024
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Less than 24 hours after the Federal Trade Commission issued a final rule this week banning employers from using noncompete agreements in the United States, the US Chamber of Commerce and the Business Roundtable filed a lawsuit against the agency in federal court in the Eastern District of Texas.

Another lawsuit was filed in federal court in the Northern District of Texas by business tax services firm Ryan.

And more may be filed in the coming weeks. "We think it's likely additional lawsuits could be filed," said employment lawyer Daniel Turinsky, a partner at DLA Piper.

Even before the rule was issued, the US Chamber had promised to sue on grounds that, in its view, the agency exceeded its administrative authority by outlawing what it deems "unfair methods of competition."

The suit argues that without a clear legislative mandate from Congress, the FTC does not have the power to issue and enforce its blanket noncompete ban.

"The FTC contends that by using regulation they can simply declare common business practices to be 'unfair methods of competition' and thus illegal. This is despite the fact that noncompete agreements have been around longer than the 110-year-old FTC and until now no one has suggested that they are illegal," the US Chamber said in a release announcing the lawsuit. "If the FTC can regulate noncompete agreements, then they can decide to regulate or even ban any other business practice. All without a vote from Congress."

The Chamber and the Business Roundtable, along with a third plaintiff - the Longview Chamber of Commerce in Longview, Texas - are asking the court to issue a stay to stop the rule from going into effect, a preliminary injunction that would prohibit the FTC from enforcing the rule while the case is being litigated, "or both."

In response to the US Chamber's lawsuit, FTC Chair Lina Khan expressed confidence the agency is on firm ground legally. Appearing on CNN's "The Lead With Jake Tapper" after the new noncompete prohibition was announced, she said the agency has "clear legal authority" to issue such a ban.

Long delays may be on tap before the rule takes effect

The FTC rule isn't set to go into effect until 120 days from the day it is published in the Federal Register. So likely not before September.

But that effective date could be postponed if the federal courts in Texas - or any other courts where suits are filed - decide to grant a stay or preliminary injunction.

That leaves employers and employees in limbo when it comes to existing noncompete agreements, almost all of which would become unenforceable if and when the rule takes effect. (The only exception here are existing noncompetes for senior executives - they will remain in force regardless.)

In the near term, "I'm generally telling clients to take a wait-and-see approach with respect to the FTC rule while court challenges play out in the next few weeks," Turinsky said.

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If the rule is put on ice until the cases are decided, and then appeals are filed, that could further delay the rule's effective date by many more months if it isn't ultimately struck down completely.

Translation: It could be awhile before the validity of the non-compete ban is determined, said James Witz, a shareholder at Littler, an employer-side law firm, and co-chair of the firm's Unfair Competition and Trade Secrets Practice Group.

But employers still seeking to issue new noncompetes while the cases are litigated, may face resistance from some employees who are now aware of the FTC's action, Witz noted.

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