Business interests that oppose the Federal Trade Commission’s (FTC’s) rule that imposes an almost complete ban on noncompete agreements are urging the courts to block the rule. The rule is scheduled to take effect September 4, but a court ruling on it is expected before the end of August.

A lawsuit challenging the rule is pending in federal district court, in the Northern District of Texas. Briefs submitted by hospitals, insurers and financial services firms are urging the court to overturn the rule, which forbids virtually all noncompete agreements. Another lawsuit, pending before a federal district court in Florida, also asks the courts to block the rule.

Most of the arguments center on whether the FTC has the statutory authority to issue the sweeping rule. But the plaintiffs and those filing briefs in support of the plaintiffs also argue that noncompete agreements safeguard confidential information and protect an employer’s investment in employee training. Nonprofit plaintiffs (e.g., many hospitals) point out that the FTC has no authority over nonprofits. Thus, they say, the rule would create “an uneven playing field” in that sector.

So far, district courts have split on the issue. A Pennsylvania district court ruled on July 23 that the FTC does have the authority to issue its noncompete rule. But earlier, a Texas federal district court granted a preliminary injunction in a case challenging the rule brought by the Chamber of Commerce and a tax firm.

 Prospects: Regardless of how the district courts decide the pending cases, the losing side is likely to appeal. Those appeals could result in a split in the appellate court decisions and thus tee up the case for a Supreme Court decision. So, it will be a while before the issue is resolved, although the Texas or Florida courts, if either or both grant a nationwide preliminary injunction, could delay enforcement of the rule beyond its scheduled September 4 effective date.

NAIFA Staff Contact: Michael Hedge – Senior Director – Government Relations, at mhedge@naifa.org.