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New York’s Failure To Pass Statewide Ban Puts The Burden Back On The Legislature To Act
Analysis
In June, the Federal Trade Commission issued a final rule banning noncompete agreements nationwide. The rule was intended to promote competition, protect the fundamental freedom of workers to change jobs, increase innovation, and foster new business formation.
The rule was set to go into effect on September 4, but on Tuesday, Judge Ada Brown from the United State District Court in Texas put the kibosh on that rule, blocking its implementation nationwide.
In accord with the recent tide of cases stemming federal agency authority, Judge Brown ruled that the FTC lacked the requisite Congressional authority to issue substantive rules related to the unfair methods of competition at the heart of the non-complete rule.
Earlier in July, Judge Brown had temporarily halted the ban. Her ruling on Tuesday blocked the ban permanently and applied nationwide.
The decision was not unexpected. The Texas plaintiffs, a tax firm, the US Chamber of Commerce, the Business Roundtable and others filed suit immediately after the rule was passed by the FTC by a 3-2 vote. The plaintiffs echoed the arguments of the two dissenting commissioners who voted against the rule, saying that though they supported a ban on anti-competitive noncompete agreements, they did not believe the FTC had the authority to pass the rule absent a clear congressional mandate.
Commissioner Andres Ferguson voted against the rule, saying that the FTC doesn’t have “the power to nullify tens of millions of existing contracts; to preempt the laws of forty-six States; to declare categorically unlawful a species of contract that was lawful when the Federal Trade Commission Act (FCT Act) was adopted in 1914.”
“Noncompete clauses keep wages low, suppress new ideas, and rob the American economy of dynamism, including from the more than 8,500 new startups that would be created a year once noncompetes are banned,” said FTC Chair Lina M. Khan at the time of passage. “The FTC’s final rule to ban noncompetes will ensure Americans have the freedom to pursue a new job, start a new business, or bring a new idea to market.”
The final rule was also expected to lead to an estimated average increase of 17,000 to 29,000 more patents each year for the next 10 years under the final rule.
According to the FTC, noncompetes are a widespread and often exploitative practice imposing contractual conditions on employees that prevent workers from taking a new job or starting a new business. Noncompetes force workers to either stay in a job they want to leave or bear other significant harms and costs, such as being forced to switch to a lower-paying field, being forced to relocate, being forced to leave the workforce altogether, or being forced to defend against expensive litigation. An estimated 30 million workers—nearly one in five Americans—are subject to a noncompete.
The rule would not have impacted laws governing protection of trade secrets and non-disclosure agreements (NDAs). The FTC estimates that over 95% of workers with a noncompete already have an NDA.
Non-solicitation agreements – agreements that prevent employees from soliciting business from their employers’ customer bases – were unaffected by the rule.
Noncompete agreements were still permitted between a buyer and seller in the bona fide sale of a business.
In New York, the FTC estimates that over 7.4 million workers will be covered by the new rule (80% of the total employed population), that the estimated increase in total annual workers earnings will be about $5.8 billion, and that the estimated increase in annual workers earnings is $793. That increase in estimated workers earnings is the third highest in the nation, after Massachusetts and Washington, DC.
Last December, Governor Kathy Hochul vetoed a bill that would have imposed a near total ban on employee non-compete agreements in New York State. Hochul previously expressed her support for the ban for “low and middle-income” employees, but was uncomfortable with a blanket prohibition covering highly compensated professionals and executives. The bill she vetoed would have banned future non-compete agreements for all employees, regardless of earnings level.
Hochul had supported exemption for employees earning $250,000 or more in total annual compensation.
In a separate case brought in Pennsylvania, a federal judge declined to block the rule. It’s likely that the cases will work their way through the Circuit Courts of Appeal, and perhaps to the United States Supreme Court. In the meantime, the status quo on noncompete agreements will continue, with a state-by-state approach to their validity, applicability, scope, and enforceability.
