Attorneys advise clients to wait and see on FTC noncompete ban
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The Federal Trade Commission’s near-total ban on noncompete agreements is scheduled to take effect in September, but two federal lawsuits challenging the ban’s validity threaten to put the agency’s new rules in legal limbo.
At the moment, there are a plethora of questions about how the FTC’s new rules would impact a variety of industries–including sales, health care, media and financial services–that depend on noncompetes to prevent employees from going to work for a competitor for set period of time after their employment ends.
But businesses aren’t moving too quickly to adjust because some attorneys predict the ban will be stalled in court as the legal challenges rage on and that the ban itself may not withstand legal muster.
“The rule is not in effect. There’s also no rule against enforcing noncompetes,” said attorney David Given, a partner at Faegre Drinker. “At the moment, it’s sort of status quo with respect to those, I think a lot of clients are in a wait-and-see sort of mode as to how this is all going to play out.”
The U.S. Chamber of Commerce and the Business Roundtable filed a lawsuit in Texas federal court challenging the new rules and arguing that without a legislative mandate that the FTC doesn’t have the authority to issue or enforce its noncompete ban.
Another Texas lawsuit filed by tax services firm Ryan makes a similar argument.
The FTC, however, argues that it has clear legal authority to issue such a ban.
While the debate rages on, businesses across an array of industries are considering how the ban could impact them if it ever goes into effect.
Sales
Even if noncompetes are taken away from the sales industry, businesses likely will still be able to rely on nondisclosure agreements and nonsolicitation agreements to protect themselves.
“With salespeople, you could still have restricted covenants that prohibit the salesperson from leaving and going and soliciting the same customers that the person was serving while at the former employer,” Given said.
Attorney Patrick McCarney at Riley Bennett Egloff LLP said most contracts containing a noncompete already also have a non-disclosure or confidentiality agreement as well, so he doesn’t suspect those will increase.
“I can’t say that there’ll be more common but I think it will continue to be used and it may be that some businesses, tweak their language and make sure that those nondisclosure confidentiality agreements are as broad as they possibly can,” McCarney said.
Financial services
Departing workers from banks and investment firms are frequently hit with lawsuits if they take clients with them as they move on to new employers, in potential violation of noncompete agreements.
But, again, non-disclosure and non-solicitation agreements can provide similar protections.
Media
Media personalities now bound by noncompetes could find new freedom under the ban.
Take longtime Indianapolis news anchor Rafael Sanchez, for instance.
Sanchez left WRTV-TV Channel 6 after working there for 26 years. He announced on his social media that he was joining Fox59/CBS4, but added that it would be a while until he appeared on screen.
Due to his one-year noncompete contract clause, he won’t be back on air until February 2025.
Given sees benefits for such individuals. “Impacts favorably if you’re an individual that’s subject to one of those non-competes in that space,” he said.
Health care
Indiana already has take some steps of its own to ban noncompetes in a sliver of the health-care industry.
Last year, the Legislature passed a law that makes noncompete agreements with primary-care physicians unenforceable. However, under that measure, other specialty physicians may be placed under a noncompete.
The FTC’s rule is much more broad and is interpreted by some as near-total ban in the health-care industry. However, there is some dispute over whether it would apply to not-for-profit hospitals.
But the FTC has said that “some portion of the 58% of hospitals that claim tax-exempt status as nonprofits and the 19% of hospitals that are identified as State or local government hospitals … likely fall under the Commission’s jurisdiction and the final rule’s purview.”
Looking forward
The FTC says that banning noncompetes will result in reduced health-care costs, an increase in new businesses, a rise in innovation and higher wages. But, for now, the big question is whether the ban will be allowed to take effect.
“We really just need to wait and see how this all shakes out. But it’s part of that overall trend in the law against the enforceability of restraints on people’s ability to earn a living in their chosen profession,” said employment attorney Kathleen DeLaney. “So in that regard, it’s hopefully trending in an employee-friendly way, but the question remains to be seen how far that will take us.”
Attorney David Carr, a partner at Ice Miller, said he believes the proper venue for changes in the law on noncompetes is at the state level. He noted that several states have already passed restrictions on noncompetes.
“I see states continuing to legislate restrictions on noncompetes, as we have seen here, even in Indiana, which tends to be pretty laissez-faire when it comes to employer-employee relations in the medical field,” Carr said. “And I think that is the future trend, that they will be whacked back to where they always should have been. And that is real situations where employees have true access to trade secrets and confidential information or are in a position to steal customers when they leave.”
Given said he also sees a trend toward narrowing the groups of employees subject to noncompetes.
“I think that trend will continue with or without the FTC rule, and you see more and more states that are even banning them or severely limiting their application,” Given said.