Update on FTC Noncompete Ban: Court Challenges Begin

On April ­­23 we reported on the Federal Trade Commission’s vote to ban almost all non-competition agreements in the United States. Within hours of that vote, Ryan LLC, a global tax consulting firm headquartered in Dallas, filed a lawsuit in the U.S. District Court for the Northern District of Texas challenging the FTC’s authority to issue such a rule.

The U.S. Chamber of Commerce has been allowed to intervene in that case and will join in the challenge to the FTC ban.

Ryan’s claims are that:

  1. The FTC lacks the legal authority to promulgate such a rule.
  2. Even if Congress had granted that authority by statute, such a grant would be an unconstitutional delegation of legislative authority to the executive branch, in violation of Article 1 of the U.S. Constitution.
  3. The FTC Act is unconstitutional because it limits the president’s authority to remove subordinates (in this case, FTC Commissioners).
  4. The FTC promulgated the rule in violation of the Administrative Procedure Act because it failed to establish a factual basis for the rule.
  5. The rule is retroactive in purporting to invalidate all existing non-competition agreements, but the FTC has no authority to issue retroactive rules.

Based on our review of the pleadings filed thus far in the case, we think that the U.S. Chamber and its allies agree that these are the correct arguments and that they will file a brief supporting them.

Ryan is asking the court for two things: a stay of the effective date of the rule, and preliminary and permanent injunctions barring the FTC from enforcing it. The case is on an expedited schedule, with briefing to be completed by June 12 and a ruling expected on the pending motion by July 3.

Given that the rule’s effective date is September 4, if the court can meet that schedule, employers should have sufficient time to take the necessary steps to comply, if the court allows the rule to go into effect.

However, we would advise employers to start identifying all employees who are subject to an existing non-competition agreement, so they can move quickly to meet the notice requirements over the summer, should that become necessary.

We will have more on this as it develops, including at our May 30 half-day program, and a more comprehensive report once we know how the court has ruled. In the meantime, if you have any questions or concerns on non-competition agreements or any other employment law issue, please contact Jim Erwin or another member of Pierce Atwood's employment group.