The federal court battle over noncompetes continues.
The latest salvo: On October 18, 2024, the Federal Trade Commission (“FTC”) filed a Notice of Appeal, seeking to overturn the decision made earlier this year by a federal District Court judge to block the commission’s nationwide ban on covenants not to compete.
I suppose both sides would say that they’re “fighting for democracy” (I know it’s a lawn sign slogan, but stay with me). Those in support of a nationwide ban might say that they’re fighting for workers’ freedom. Those in opposition might point out that we live in a constitutional republic, not a democracy, that it’s a state law issue, and that unelected bureaucrats don’t get to make up regulations that lack any statutory basis.
Either way, the volleys in this battle move slowly–think pendulum as opposed to ping-pong. And right now, despite the appeal, the pendulum is still on the side of “state law controls”.
Will it remain there, frozen in time, or will it swing hard to the other side? Only time will tell.
Background
On January 5, 2023, the FTC proposed a broad rule banning employers from imposing noncompete provisions on their workers. Per that rule, “employer” and “worker” are not limited to the true employer-employee relationship, and include subcontractor and independent contractor relationships as well. The rule would supersede all state laws, except to the extent that a state’s law gives workers greater rights.
After some modification, the rule was finalized (the “Final Rule”) and set to go into effect on September 4, 2024.
However, before it could go into effect, federal court cases were brought challenging the FTC’s authority to issue the Final Rule.
In the seminal case, brought by Ryan, LLC and joined by others, the plaintiffs initially obtained an injunction against the FTC’s enforcement of the rule against them alone. The case moved forward until August 20, 2024, when the judge granted the plaintiffs’ motion for summary judgment and issued an order completely setting aside the Final Rule–in laymen’s terms, the court blocked the Final Rule from taking effect as to anyone.
By way of its filing of a Notice of Appeal on September 18, the FTC is essentially asking the Court of Appeal to overturn the District Court’s order, thereby, either Phoenix-like or Dracula-like, depending upon your position, reinstituting the Final Rule.
OK, So What Does This Mean for You?
It helps to think of the issue as a slightly mutated Schrodinger’s cat.
If the Final Rule is dead, that doesn’t mean that the issue itself is dead because, depending on what particular state law applies, noncompetes and other restrictive covenants might or might not be enforceable.
If the Final Rule is alive, then its ban, and any more-restrictive applicable state law provisions, will apply.
According to the U.S. Chamber of Commerce, currently, 46 states permit noncompete clauses. However, it’s certainly the fact that some of those states permit noncompetes only under certain limited circumstances.
But the reality, for both businesses and workers (e.g., medical groups and employed physicians), is even more complex.
That’s because despite the fact that some of these states have strong prohibitions against the enforcement of noncompetes, California being the classic example, and even if the Final Rule is (once again) alive, there are, depending upon the particular state, still ways to create agreements that can function as proxies for noncompetes. Are they exact counterparts? No. Might they be good enough? Yes. Note that these issues are not only dependent upon the particular state law that governs, but also the particular facts involved. It’s a significant issue but it can have significant benefits for businesses and can have particular implications, sometimes “bad” and, perhaps surprisingly, sometimes of benefit, for the “worker”.