A few weeks ago, the Federal Trade Commission held a public forum examining the FTC’s proposed rule to prohibit employers from imposing noncompetes on their workers, providing an opportunity for people to directly share their experiences with noncompetes. According to the FTC, the forum was meant to “supplement the FTC’s request for members of the public to submit written comments on the proposed rule, which is based on a preliminary finding that noncompetes constitute an unfair method of competition and therefore violate Section 5 of the Federal Trade Commission Act.”
Noncompetes have a controversial history and are seen by some as an exploitative practice that prevents entrepreneurs from starting businesses of their own, suppresses wages, and impedes growth and innovation. If this rule is passed, the FTC estimates an increase in worker’s wages by about $300 billion per year with expanded career opportunities for millions of Americans.
It is expected that the rule will go into effect; however, the FTC’s noncompete agreement ban will very likely face legal challenges. Here’s what you should know.
Courts will likely be involved
Courts are likely to challenge this ban as legal experts are not confident the rule will be seen as adequate as it is. The U.S. Chamber of Commerce and other business groups are criticizing the rule as unlawful and are prepared to challenge it in court. Other criticisms mention how the rule would negatively impact businesses and hinder them from innovating.
The FTC sees agreements like noncompetes as unfair practices that violate the Federal Trade Commission Act. The new rule applies to any paid or unpaid person working for an employer and includes independent contractors. The FTC is currently seeking public comment.
Challenges the FTC Could Face
The biggest issue facing the FTC is even if they were found to have the authority to regulate noncompetes, the federal appeals court has the power to review any finding and reverse decisions made by the FTC. For the ban to get passed, the FTC would have to prove that noncompetes harm consumers both in general and in the marketplace. Similarly, they would have to prove that a ban like this would harm the consumer.
Verbiage is also another challenge facing the FTC. The law pays attention to language and how things are defined. The FTC defines a worker as paid or unpaid including contractors. In a court of law, the FTC would need to be very clear on how they define a worker. However, it’s likely that would only be one part of the rule that will be litigated once a final rule is adopted.
This Could Be the End for Noncompetes
More and more, states are enacting laws that ban or restrict noncompete agreements. Many see this as the beginning of the end for noncompetes regardless of potential court challenges or defeats.
States like California, North Dakota, and Washington D.C. look unfavorably against noncompetes. Other states have similar views creating laws that block noncompetes unless a worker makes money above a certain threshold. Texas is not currently one of the states that has banned noncompete agreements, but it does look unfavorably on anything that restricts an employee’s mobility. With the rise in states banning agreements like these, more are likely follow.
If You’re a Business Owner, Take a Look at Your Noncompete Agreements
Whether the FTC’s ban on noncompetes actually passes or not, it’s clear the tide is shifting away from enforcing noncompetes as more states pass laws against them. Whether you are a business owner or a worker, it’s time to take a look at your noncompete agreement and understand your rights.
If you see something amiss or are curious about how this ban could affect you or business in your state, it’s important to get the advice of a business attorney well versed in these matters. Contact us with any questions. We can help ensure your businesses is best prepared.