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The Federal Trade Commission’s (FTC) noncompete ban, which is set to take effect on September 4, is facing numerous legal challenges. In two recent cases, judges offered differing views on the legality of the FTC ban.
Ban temporarily blocked in Texas. On July 3 a Texas federal judge issued a temporary partial block of the noncompete ban from taking effect for plaintiffs named in a lawsuit against the FTC. The judge wrote that the FTC rule is “arbitrary and capricious,” in part “because it is unreasonably overbroad without a reasonable explanation.” The judge took issue with the ban for having a “one-size-fits-all approach with no end date.”
For now, that ruling is narrow, as it only applies to the five entities that sued, including Ryan LLC, a Dallas-based tax firm, as well as the US Chamber of Commerce and the Texas Association of Business.
The court said it would “rule on the ultimate merits of this action” by August 30, and attorneys with law firm Fisher Phillips suggested the scope of the ruling may expand at that point.
Pennsylvania decision. A federal judge in Pennsylvania, however, rejected a similar challenge to the noncompete ban on July 23.
The court found ATS Tree Services, a tree-trimming company that filed a lawsuit to block the ban, failed to show it would suffer irreparable harm as a result of the rule, and it was denied a preliminary injunction. In a hearing held on July 10 the judge, Kelley Brisbon Hodge, questioned ATS about the estimated number of employees that would leave the company as a result of the noncompete ban. In the July 23 decision, she wrote that the court found that no ATS employee had quit or intended to resign as a result of the FTC rule, and the company’s speculation that it would cause harm was “inadequate.”
Brisbon Hodge also said the FTC has the authority to issue “procedural and substantive rules as is necessary to prevent unfair methods of competition.”
How employers can react. A federal judge in Florida is expected to respond to an additional lawsuit filed by The Villages, a residential community in Florida, on July 25. For now, most employers should still prepare to comply with the FTC’s noncompete ban by the effective date in September.
The rule, which was issued back in April, prohibits employers from entering into noncompetes with any workers. Most noncompetes that have already been signed will also be unenforceable after the ban takes effect.
Experts previously told HR Brew employers should be careful about entering into noncompetes in light of the ban, and consider alternative clauses to protect themselves from competition or dissemination of trade secrets by previous employees.