Ban on Non-Competes Lifted – for Now

In late August, a federal court in Texas upheld a lawsuit to quash the ban on non-compete agreements issued by the Federal Trade Commission (FTC). The court held that the FTC had exceeded its statutory authority in imposing the ban, which supersedes state regulations. The court noted that 46 states have regulations pertaining to non-competes, whereas there is no such federal statute; it also estimated that one in five employees in the US is subject to some sort of non-compete covenant, or about 30 million people. In their policy formulation, the FTC deemed non-compete-clauses as “unfair methods of competition. The plaintiffs asserted the following reasons for denying the ban: “(i) the FTC acted without statutory authority; (ii) the Rule is the product of an unconstitutional exercise of power, and (iii) the FTC’s acts, findings and conclusions were arbitrary and capricious.” The plaintiffs also added a charge that the Rule is unlawful under the Declaratory Judgment Act.

The Court upheld all of the plaintiffs’ assertions with extensive examples of legal precedence. Bottom line: the overreach of this activist FTC was fully checked (at least for now), and they have to go back to the drawing board.

In a separate but similar action, a court in Florida reached the same conclusion, but that judgement applies only to a district in central Florida, whereas the one above is nationwide. A judge in Pennsylvania ruled in the other direction in July, upholding the FTC ban, but it was noted by the judge in Florida that the Pennsylvania plaintiff had some points in its case that were problematic, hence the loss.

If the ban is finally upheld in some form, employers can exercise the alternative of having employees sign non-disclosure agreements (NDAs) to protect trade secrets, customer lists and other proprietary company information. They can also have new hire sign customer non-solicitation agreements to avoid “poaching” of customers if an employee should leave. Either way, employee handbooks will have to be updated accordingly to encompass any changes.