FTC's non-compete ban likely to face SCOTUS challenge, say lawyers

Legal experts predict commission’s rule banning non-competes will be overturned by US Supreme Court | US Chamber of Commerce plans to sue the FTC for its “unlawful” and “blatant power grab” | Ruling aimed at promoting competition and protecting workers' freedom | Creates a “risky landscape” for businesses by taking away “best means” of preventing trade secrets misuse, say critics.

A Federal Trade Commission’s (FTC) rule banning non-compete agreements for approximately 30 million workers in the US will be struck down by the US Supreme Court, according to lawyers.

The ruling, issued April 23, 2024, aims to promote competition, protect the freedom of workers to change jobs, increase innovation, and foster new business formation.

FTC chair Lina Khan said: “Non-compete clauses keep wages low, suppress new ideas, and rob the American economy of dynamism, including from the more than 8,500 new startups that would be created a year once non-competes are banned.

“The FTC’s final rule to ban non-competes will ensure Americans have the freedom to pursue a new job, start a new business, or bring a new idea to market,” she added.

The rule was approved by a 3-2 vote, with commissioners Melissa Holyoak and Andrew Ferguson voting against.

The US Chamber of Commerce said it planned to sue the FTC for its “unlawful” and “blatant power grab that will undermine American businesses’ ability to remain competitive”.

The FTC has never been granted the constitutional and statutory authority to write its own competition rules, argued the US Chamber of Commerce in a statement.

“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 non-compete agreements in all sectors of the economy.

“This decision sets a dangerous precedent for government micromanagement of business and can harm employers, workers, and our economy,” it added.

Reaction to FTC rule

On January 5 2023, the FTC unveiled a proposed rule that would ban employers from imposing a clause on workers that many say has deterred acts of theft.

Jim Gale, partner at Cozen O’Connor, was aghast at the development, describing it as “absolutely horrible”.

He argued that, if implemented, the ban will encourage trade secrets theft, make theft harder to prove in court, and will, ultimately, stifle innovation.

“I hate this rule. I understand that the FTC was trying to protect low-income workers. But many states have already enacted statutes that would protect them—and that's a good thing.”

Fast forward a year later and nothing has changed Gale’s opinion. Referring to the FTC’s approval, Gale said his feelings “have not changed”.

“I still hate it,” said the litigator.

Gale believes it will not survive a challenge and that the US Supreme Court will ultimately strike it down.

‘Bold move’

Seth Gerber, partner at Morgan Lewis described the FTC non-compete rule as a “bold move” that can have significant ramifications for the American economy.

Gerber said: “The FTC is breaking down the traditional barriers of restrictive covenants in order to encourage the sharing of innovative ideas to spur entrepreneurship and economic growth.

This, according to Gerber, raises concerns for business owners with trade secrets who don’t want their innovative ideas shared with competitors.

“Non-competes will no longer exist as a blunt force means to silo intellectual property behind corporate walls,” he added.

Debbie Berman, partner at Jenner & Block, echoed Gale in predicting the rules will be “undoubtedly” challenged in the courts.

“The future litigation creates a risky landscape for businesses as they try to protect their most valuable trade secrets and confidential information,” she noted.

“The rule will take away the best means of preventing the improper use or disclosure of trade secrets and confidential information,” Gale argued.

However, Gale did advocate for modifications to restrictive covenant laws.

“I believe that low level employees who are not exposed to a company’s trade secrets or goodwill, should be exempt from non-competes,” he suggested.

Berman predicted “rapid movement” by businesses to implement alternatives to non-competes, such as non-solicitations agreements and deferred compensation plans.

This is because businesses “won’t take a gamble on protecting their proprietary information,” she argued.

FTC’s final rule on non-competes

Under the FTC's new rule, existing non-competes for the vast majority of workers will no longer be enforceable after the rule’s effective date—120 days after its publication in the Federal Register.

While existing non-competes for senior executives—representing less than 0.75% of workers—can remain in force, employers are prohibited from entering into or attempting to enforce any new non-competes, even for senior executives.

Employers will also be required to provide notice to workers, other than senior executives, who are bound by an existing non-compete, informing them that the non-compete will not be enforced against them.

The commission found that non-competes negatively affect competitive conditions in labour markets by hindering efficient matching between workers and employers, as well as in product and service markets, inhibiting new business formation and innovation.

Additionally, non-competes have been linked to increased market concentration and higher prices for consumers.

The commission identified several alternatives to non-competes, including trade secret laws and non-disclosure agreements (NDAs).

Under the FTC's final rule, confidentiality agreements and NDAs may be considered non-compete agreements if they prevent a worker from disclosing information that is usable in or related to their industry, effectively preventing them from working for another employer in the same industry, Gerber explained.

Additionally, an agreement may be considered as a non-compete if it prevents workers from disclosing any information obtained during their employment, including publicly available information.

The commission also encouraged employers to compete for workers based on the merits, such as by improving wages and working conditions.

James Pooley, an independent trade secret litigator, believed that in general, the new rule is not significantly different to what came before.

“It does allow an exception for existing non-competes for ‘senior executives’ with policy making authority and who are paid more than $150,000 a year, and it doesn’t apply to non-competes outside the US,” he explained.

Furthermore, the commission has eliminated a provision from the proposed rule that would have required employers to formally rescind existing non-competes.

Instead, employers will be required to provide notice to workers bound by an existing non-compete that the agreement will not be enforced against them in the future.

Gerber felt the FTC “has prompted many companies to rethink the breadth and impact of their restrictive covenants, including confidentiality agreements.”

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