‘It still could happen’: Ban on noncompete clauses has uncertain fate
The fate of a ban on noncompete clauses remains in flux after a federal judge granted an injunction in a suit brought by key business groups, meaning some top talent will have to stay put — for now.
The Federal Trade Commission announced a sweeping ban this April on noncompete agreements, or clauses in employment contracts restricting staff from leaving their jobs to work for competitors or start their own businesses for a certain amount of time. Noncompetes are standard for those in the C-suite, and the rule would ban new agreements for executives or those earning more than $151,164 annually who are in a “policy-making position.”
But these clauses also cover a wide range of workers, with about half of private-sector businesses in the U.S. requiring at least some employees to sign noncompete agreements, according to a 2019 study from the Economic Policy Institute.
While employers have long used such clauses to protect and preserve their own trade secrets and relationships with clients, the FTC commissioners who voted for the initial ban said they are exploitative, suppress wages and competition, limit career mobility, and hamper the creation of new businesses.
Ultimately, major business groups including the U.S. Chamber of Commerce filed suit against the FTC right after the rule was released.
U.S. District Judge Ada Brown in Texas wrote in her injunction last week that the FTC overstepped its authority issuing the ban. To be sure, the injunction doesn’t stop the ban nationwide, and for now only applies to the groups that filed the suit. But Judge Brown said she would issue a final ruling before the ban is set to take effect on Sept. 4, and her decision could extend the pause on the rule to more employers.
“It’s not a nationwide ban, which is sort of what plaintiffs and really employers all over the country were sort of hoping would happen, and it still could happen,” said Mark Kluger, partner at employment law firm Kluger Healey.
However, legal experts foresee a range of challenges likely to prevent the rule from being enacted. “Given the potential impact on approximately 30 million noncompete agreements, it is not surprising that the court decided to halt implementation until the lawfulness of the rule, and the FTC’s power to implement it, were decided. It will take years for this litigation to be completed,” said Peter Rahbar, an employment attorney at the Rahbar Group.
Some states have their own laws banning noncompetes, and Rahbar expects more to follow suit given the greater focus on them. “As the FTC litigation progresses, I expect to see continued action on the state level, where the trend has been to limit or ban non-compete agreements,” Rahbar said.
“With the amount of focus on the FTC rule, and the overwhelming support of workers for the rule, state legislators know that banning noncompetes can be a popular issue with potential voters in an election year,” he added.
Whether a federal rule ever does take effect, employers can and should still rely on other tools similar to noncompete agreements to protect company secrets and intellectual property, like non-disclosure agreements and non-solicitation clauses, according to employment experts.