On April 24, 2024, the Federal Trade Commission (FTC) issued its final rule banning the use of non-compete agreements in nearly all employer/employee relationships with the only exceptions being for senior executives. Those exempt executives must be in a policy making position and earn more than $151,164 annually, otherwise they are included in the ban.
The effective date of the new rule was scheduled for Sept 4 but a U.S District Court judge in Dallas, Texas (Ada Brown) agreed to temporarily delay implementation until the challenge by the U.S. Chamber of Commerce can be argued on the full merits.
Despite very common usage (U.S. Chamber of Commerce (USCC) (30 million non-competes in the U.S.) this has been a contentious area of business law for many years. Employers generally like them, and workers generally do not.
Both groups have their reasons which are summarized below.
The Business Community Position
Generally, USCC speaks on behalf of the business community, and believes that the very widespread use of non-competes (30 million) is a good reason not to ban them. Eliminating all of them would cause a major disruption to the economy in general.
They also argue that without these non-competes, businesses would face a significant amount of unfair competition, i.e., workers would learn the key information of their businesses and would use that info to compete with them.
In their complaint against the FTC rule banning most non-competes, the U.S Chamber’s chief counsel Daryl Joseffer was quoted as saying that the new rule “sets a dangerous precedent where the government knows better than the markets”. It is very hard to believe he is really saying that, if you think about it. The government is certainly deserving of a lot of criticism but how is it that “the markets” are smarter than the government? I guess that is just a new low in how many think about the government. Anyway, let’s move on.
The FTC Position
The FTC believes that non-compete agreements unfairly block workers from switching jobs and undermine labor competition. They also claim that many of these agreements are often illegal to begin with because they have long terms of effectiveness and other onerous requirements. Even so, they still serve as an effective deterrent for both the employee and the firm who is considering that employee by the threat of litigation.
It is fairly simple for an employer to begin a lawsuit to enforce the contract by serving a show cause order or delivering a “cease and desist letter”. The potential new employer can also be notified of the non-compete and threaten enforcement action against them.
Taken as a whole, the FTC believes non-competes reduce innovation, inhibit economic growth, trap workers in jobs, and limit economic freedom.
It is interesting that the U.S. Treasury Dept did a survey in 2022 and found that 20% of workers were bound by a non-compete agreement. These included 45% of Primary Care doctors, and 40% of Technology workers.
Having nearly half of primary care doctors under non-compete agreements would seemingly prevent any of their previous patients from following “their doctor” to his or her new practice.
A challenge to most any new rule by a Federal Agency is a pretty high bar to overcome. This is because, as I understand the “Administrative Procedures Act”, the rules made by federal agencies to carry out laws enacted by congress, including, I would assume, “restraint of trade” legislation, are beyond court review.
The only exception would be where the claim being made is that the new rule goes beyond intent of the law that the rule is carrying out, and then to prove that is the reality in the present case.
So, we should soon find out if the U.S. Chamber of Commerce, and other interested parties can overcome the new rule and the administrative procedures act. Not being an attorney, it does seem, on the face of it, to be a pretty high bar. But the opinion of federal judges can create a “High Bar” themselves and, quite often, have little hesitation in doing so. Stay tuned.
As Always, Keep Safe and Peace!