Local labor attorneys expect a quick court challenge to a planned federal ban on virtually all non-compete agreements.
The Federal Trade Commission on Tuesday voted 3-2 to ban employers from using noncompetes, which are often used to prevent employees from leaving to go work for a competitor.
Dean Pacific, a labor attorney and partner at Grand Rapids-based Warner Norcross + Judd LLP, expects a court challenge to come as soon as Wednesday. The U.S. Chamber of Commerce has vowed to challenge the ban as exceeding the FTC’s rule-making authority.
“Very quickly, it’s going to be the subject of litigation,” said Pacific, who expects a case to ultimately get decided by the U.S. Supreme Court. “It’s such a sweeping regulation of the economy.”
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First proposed in January 2023, the ban takes effect 120 days after the FTC publishes the 570-page rule in the Federal Register.
Employers who use noncompetes need to pay attention to the proposed ban, although given the expected litigation, it may take years before it actually takes effect, presuming it survives the expected court challenge, labor attorneys say.
“The Federal Trade Commission’s decision to ban employer noncompete agreements across the economy is not only unlawful, but also a blatant power grab that will undermine American businesses’ ability to remain competitive,” the U.S. Chamber said in a Tuesday afternoon statement. “Since its inception over 100 years ago, the FTC has never been granted the constitutional and statutory authority to write its own competition rules.
“Noncompete agreements are either upheld or dismissed under well-established state laws governing their use. Yet, today, three unelected commissioners have unilaterally decided they have the authority to declare what’s a legitimate business decision and what’s not by moving to ban noncompete agreements in all sectors of the economy.”
Pacific expects a court will issue an injunction against the ban’s enforcement, until a case is heard and decided. He thinks “there’s good reason to believe the court might agree with the folks that say this is an overreach by the agency and they don’t have this authority to pass a rule like this, a rule this sweeping.”
The rule the FTC adopted would ban all new non-compete agreements and render nearly all existing noncompetes unenforceable.
An exception to the ban covers senior executives who earn more than $151,164 annually and hold a “policy-making position.”
“If you have an existing noncompete, that can remain in effect” for senior executives, “but you still can’t enter into a new noncompete,” Pacific said.
The FTC estimates that one in five U.S. workers — or 30 million people — are subject to a non-compete agreement that limits their ability to change jobs or start a business without relocating outside of the market.
The number of U.S. workers affected by the ban is “pretty huge,” said attorney Elizabeth Wells Skaggs, a labor and employment law partner at Grand Rapids-based Varnum LLP.
Wells Skaggs calls the FTC adoption of the noncompete ban “quite momentous because of the volume of U.S. workers and businesses that are going to be affected by this.”
“It’s just going to be a sea change in how businesses interact with their employees and their independent contractors and what businesses do to try to protect their own trade secrets and confidential and proprietary information from competitors,” she said.
Quite often, new regulations from federal agencies get challenged in court as a violation of the U.S. Constitution or for a lack of congressional authority, said attorney Mark Smith of Grand Rapids-based Rhoades McKee PC.
“Every time an administrative agency has taken a position that causes significant disruption with the business community, groups within that community take it up as a matter of litigation,” said Smith, who believes that noncompete agreements have been overused for years.
“People just sort of lazily adopted them for their entire workforce, and they were never appropriate for a lot of jobs,” he said. “It was overkill.”
Even with the promise of a court challenge, the legal experts interviewed for this report each urge employers that now use noncompetes to pay attention to the issue. If they don’t already, employers should consider instead using non-disclosure agreements with key staff to protect sensitive information, strategy, trade secrets or intellectual property. Another option is to use non-solicitation agreements to prevent employees such as sales representatives from poaching customers when they leave a company for another job.
“You don’t want to have your number-one marketing guy going to your competitor and saying, ‘Here’s what my former employer was going to do in terms of capturing the market. Is that helpful information for you?’” Smith said.
Those alternative agreements “need to be carefully drafted to make sure they don’t run afoul of the prohibition on noncompete agreements,” Well Skaggs said.
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