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U.S. Chamber of Commerce and Other Organizations Sue to Stop the Federal Trade Commission from Enforcing Its New Rule Banning Non-Compete Agreements.

U.S. Chamber of Commerce and Other Organizations Sue to Stop the Federal Trade Commission from Enforcing Its New Rule Banning Non-Compete Agreements

May 20, 2024

On April 23, 2024, the Federal Trade Commission (“FTC”) approved by a 3 to 2 vote a new Rule banning non-competes in the United States.  If the federal courts do not stop the FTC’s implementation and enforcement of the Rule, the rule will go into effect on September 4, 2024.  The ban on non-competes covers all U.S. employees (including independent contractors) with only limited carve-outs, including for non-profits.

The limited carve-outs also include an exception for existing agreements with “senior executives” and for non-competes entered into as part of the bona fide sale of a business.  Senior executives are defined as individuals who earn at least $151,164 and have policy making authority for the entire organization.  This exception only allows for existing non-competes in place prior to the September 4, 2024, effective date.  The Rule does not allow for new non-competes with senior executives after the effective date.

The Rule will also require employers to notify employees who have signed non-compete agreements that the non-compete will not be and cannot be legally enforced.  Notably, even if the courts allow the Rule to take effect in September, the Rule will not ban non-solicitation agreements, unless the non-solicitation agreement is functionally the same as a non-compete agreement.

A number of lawsuits have already been filed challenging the legality of the Rule.  The first case, Ryan, LLC v. Federal Trade Commission, was filed within hours of the FTC vote.  Ryan, LLC is a global tax services firm that uses non-competes in its shareholder agreements.  The United States Chamber of Commerce (“Chamber”) has also filed a lawsuit and has requested the court to issue a preliminary injunction to prohibit the FTC from enforcing the Rule during the pendency of the litigation.  The court is expected to rule this summer on this request for a preliminary injunction.

The Plaintiffs in these court challenges generally assert that the FTC lacks the statutory authority to enact this type of sweeping ban.  First, Congress did not delegate this type of sweeping authority to the FTC as such delegation must be clear and direct.  Moreover, even if a court determined that Congress delegated such authority to the FTC, any such delegation by Congress could be viewed as an improper delegation of authority under the Non-Delegation Doctrine.  The Constitution provides that “all legislative Powers herein granted shall be vested in a Congress of the United States.  Congress may not transfer such authority to another branch of government such as the FTC which is part of the Executive branch.

Although courts in the past have given great deference to federal agencies regarding their rule making authority (commonly referred to as Chevron Deference), the United States Supreme Court heard oral argument in two cases this term that question the ongoing vitality of Chevron Deference.  It is expected that the Supreme Court will either end such deference altogether or severely limit a federal agency’s right to deference.  If a court grants a preliminary injunction, then the Rule could be on hold for more than a year while the matter is fully litigated in court, including any appeals to a Court of Appeals and the United States Supreme Court.

Even if the courts stop the FTC from enforcing this Rule, employers still need to comply with any state law restrictions on non-competes.  As an example, Maine, Massachusetts and Rhode Island have statutes restricting the use of non-competes and each imposes its own procedural requirements for permissible non-competes.

For any questions regarding this Rule or non-competition and no-solicitation agreements, please contact Peter Bennett (pbennett@thebennettlawfirm.com) or Rick Finberg (rfinberg@thebennettlawfirm.com).

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