FTC’s Ban on Non-Compete Agreements Under Legal Attack

NEW YORK (AP) — The federal government wants to make it easier for employees to leave their jobs and join a rival company. But some companies say a new rule by the Federal Trade Commission will make it harder to protect trade secrets and the investments they make in their employees.

At least three companies have sued the Federal Trade Commission after the commission voted to ban noncompete agreements, which prevent employees from working for rival companies for a period of time after leaving a job. The companies are now awaiting a decision on their cases in Florida, Pennsylvania and Texas, and the case could end up in the U.S. Supreme Court.

Here’s what you need to know about non-compete agreements:

what are they?

In the past, non-compete agreements were seen as a way to protect trade secrets among top executives, but they are now more common, with some companies requiring low-wage employees in fast-food and retail restaurants to sign them before accepting a job.

The agreements prevent employees from getting a job. with a competing company or start a competing business for a specified period of time, to prevent employees from taking company secrets, sales information, customer relationships, or skills to a competing company.

What did the FTC do?

the The Federal Trade Commission voted in April to ban employers nationwide. from entering into new non-compete agreements or enforcing existing non-compete agreements as of September 4, saying the agreements restrict workers’ freedom and suppress wages.

“In many cases, non-compete agreements are ‘take it or leave it’ contracts that exploit workers’ lack of bargaining power and force workers to stay in jobs they would rather leave, or force workers to leave the profession or even move elsewhere,” the FTC said.

The Federal Trade Commission says about 30 million people, or one in five workers, are subject to non-compete agreements. This in turn limits their ability to change jobs, which is often the best way to get a raise or promotion. Some people don’t even realize they’ve signed one until they’re hit with a lawsuit after they change jobs.

The FTC’s rules do not apply to senior executives, which the agency defines as workers earning more than $151,164 and who hold policy-making positions.

Several states, including California, have already imposed bans on non-compete agreements.

“As far as I know, there are a lot of companies in California, and high-tech workers, that are doing well,” said Tom Spiegel, founder of Spiegel, a Washington, D.C.-based law firm that focuses on worker protections.

“They’ve just gotten a little out of hand with chefs being subject to non-compete rules in some industries,” Spiegel added. “Think about it. You can’t work in a position like that for a year or more, and there’s often a geographic circle. You have to move to keep working. For people who are making enough on the front lines, they sing the non-compete. Why?”

Who is suing the FTC and why?

Companies opposing the ban say they need non-compete agreements to protect labor relationships, trade secrets and investments they make in training or hiring employees.

“The ban would make it easier for big-name professionals to go across the street and compete against us,” said John Smith, chief legal officer at Ryan, a Dallas-based tax services firm that sued the FTC.

Ryan uses non-compete agreements and non-disclosure agreements to ensure that employees don’t share trade secrets when they leave. But non-disclosure agreements are harder to uncover—and enforce—than non-compete agreements.

“In an NDA, the employee leaves, and you don’t know what information they’re sharing with their new employer, who’s your competitor,” Smith says. “It can take a lot of time and money to figure that out.”

Business groups have voiced support for Ryan’s lawsuit, including the Society for Human Resource Management, which said the FTC’s rule was too broad and would discourage employers from investing in training workers if those workers could easily quit the next day and take their knowledge elsewhere.

U.S. District Judge Ada Brown ruled that Ryan and its co-plaintiffs, including the U.S. Chamber of Commerce, are likely to prevail in court and that the ban on non-compete agreements cannot go into effect for them until their case is resolved.

In Florida, a retirement company called Properties of the Villages sued, saying that its salespeople’s lifelong relationships with community residents are at the core of its business model. The company said it invests heavily in training its salespeople, and that they sign non-compete agreements that say they won’t compete for 24 months after leaving the company to sell homes in the Villages, a 58,000-acre community.

Lawyers for the Villages’ properties said at a hearing Wednesday that the FTC’s ruling would have major economic consequences, and under the so-called “key questions” doctrine, Congress cannot delegate to executive agencies issues of major political or economic importance.

While U.S. District Judge Timothy Corrigan expressed sympathy for low-wage workers caught in non-compete agreements, he said the plaintiff is likely to succeed in his argument that the FTC rule is based on the key questions doctrine.

He noted that the FTC estimates that, by one measure, employers will pay between $400 billion and $488 billion more in wages over a decade under the rule. “Suffice it to say, the transfer of value from employers to employees, from some competitors to others, from existing businesses to new businesses, and other incremental effects will have a huge economic impact,” he added.

Rachel Westmoreland, a Justice Department attorney who defended the FTC, said Wednesday that Congress intended the FTC to act to prevent unfair competition, and that all non-compete agreements are unfair. “They’re stifling competition. That’s their entire purpose,” she said.

Corrigan issued a preliminary injunction in the case, blocking the rule from applying to Properties of the Villages alone until the case is resolved. He said his ruling does not apply to any other company and will not prevent the FTC rule from taking effect on Sept. 4.

Meanwhile, ATS Tree Services has filed a lawsuit against the FTC in Pennsylvania, in a separate case, calling the proposed ban unfair and saying it usurps states’ authority to set their own laws.

ATS said it makes its employees sign non-compete agreements because it invests in specialized training for workers and can’t afford it if employees are able to leave and immediately use that training and confidential company information to benefit a competitor.

But U.S. District Judge Kelly Hodge said the tree company had failed to prove it would be irreparably harmed by the ban, and the company was unlikely to win the case.

What happens next?

In Texas, a judge there plans to enter a ruling on the matter, essentially a decision on the case without a trial, on or before Aug. 30. In Pennsylvania, ATS Tree Services is expected to file a motion for summary judgment later this month.

With mixed rulings expected in these cases — and the losing side’s lawyers likely to appeal — observers expect the case to make its way to the U.S. Supreme Court.