A federal court last week issued a preliminary injunction against the Federal Trade Commission’s rule to ban the use of noncompete clauses in employee contracts. The injunction stops the rule from taking effect with respect to the plaintiffs who filed lawsuits against the rule—tax services firm Ryan LLC and several nonfinancial business trade associations. The court stated that it intends to rule on the merits of the challenge prior on or before Aug. 30. The rule’s effective date is Sept. 4.
While the FTC does not have regulatory authority over banks, it does have authority over bank affiliates. The FTC also claims authority over bank holding companies.
The FTC rule would make it illegal for an employer to enter into a noncompete agreement with a worker, maintain a noncompete with a worker or tell workers they are subject to a noncompete. Noncompete agreements with senior executives finalized before the rule’s effective date of Sept. 4 would remain in force under the rule. Existing noncompete agreements with other workers would not be enforceable after the effective date, under the rule.
In issuing the injunction, the court held that the FTC lacks authority to create substantive rules—like the noncompete ban—under its authority to regulate unfair methods of competition. The court also held that the rule is arbitrary and capricious because it is “unreasonably overbroad without a reasonable explanation” for its breadth.
