The Federal Trade Commission’s April vote to approve a final rule banning noncompete clauses received swift and significant pushback from corporations who deemed the agreements necessary to their operations.
In its Rule, the FTC described noncompetes as an “exploitative practice” that prevent workers from starting new businesses or switching jobs, effectively forcing them to stay with their current employer. It leaned heavily on language from the FTC Act, specifically citing “unfair method of competition” as the basis for the violation.
Those in opposition saw the new rule as a roadblock that would thwart their company’s ability to invest in top-tier management and innovation because of a need to limit access to sensitive and proprietary information. Lawsuits challenging the rule with the hopes of blocking its enactment were filed immediately.
Two recent decisions, including Ryan LLC v. Federal Trade Commission and the overruling of Chevron USA, Inc. v. Natural Resources Defense Council,have become the first of what will potentially be many court cases that will have a major impact on whether or not this proposed Rule can endure until it is scheduled to take effect in September.
The lawsuit Chevron USA, Inc. v. Natural Resources Defense Council, known simply as The Chevron Doctrine, refers to a 1984 US Supreme Court ruling that decided the courts should defer to the agency who has the expertise in that category in cases of ambiguity. In June of this year, the Supreme Court overruled that decision, meaning an agency’s interpretation will no longer be the final word. For the FTC, that means a responsibility to present a higher burden of proof as they seek to illustrate that noncompetes represent an “exploitative practice” and are in violation of the FTC Act.
The recent Ryan LLC v. Federal Trade Commission, lodged by food distribution company Ryan Foods, stated that the FTC doesn’t have the judicial power to issue a nationwide ban on noncompetes, nor is it empowered to retroactively invalidate existing noncompete agreements. In an opinion issued earlier this month, a US District Judge agreed and entered a preliminary injunction that prevented enforcement of the FTC Rule. In her opinion, Judge Ada Brown stated that the FTC does not have rulemaking authority. This was a substantial decision that will undoubtedly carry weighty precedent. For now, the ruling only applies to the parties within that legal dispute, but the court is expected to issue a final order “on the merits” just before the Rule is expected to take effect.
