The Federal Trade Commission rule banning employment noncompete agreements with all workers, including most senior executives, is now scheduled to take effect in September. The rule was published in the Federal Register on May 7 and becomes effective 120 days after publication, resulting in the effective date of Sept. 4.

The FTC approved the final rule April 23 in a 3-to-2 vote. However, shortly after the FTC issued the final rule, two separate legal challenges — one by global tax consulting firm Ryan LLC and one by the US Chamber of Commerce — were filed in different Texas federal district courts, according to a post by the law firm Skadden. Another case was subsequently filed by a small business in the District Court for the Eastern District of Pennsylvania. All challenges sought to block the rule.

Since those challenges were filed, the Chamber of Commerce case has been stayed by the District Court for the Eastern District of Texas pursuant to the “first to file rule” because the Ryan case was filed a day prior in the District Court for the Northern District of Texas, according to Skadden. On May 7, Judge Ada Brown of the Northern District of Texas issued an order setting a schedule to decide by July 3.

Ryan is asking for a stay of the effective date of the rule and for preliminary and permanent injunctions barring the FTC from enforcing it, attorney James Erwin of law firm Pierce Atwood writes in The National Law Review.

Ryan’s case claims that:

  1. The FTC lacks the legal authority to promulgate such a rule.
  2. Even if Congress had granted that authority by statute, such a grant would be an unconstitutional delegation of legislative authority to the executive branch, in violation of Article 1 of the US Constitution.
  3. The FTC Act is unconstitutional because it limits the president’s authority to remove subordinates (in this case, FTC commissioners).
  4. The FTC promulgated the rule in violation of the Administrative Procedure Act because it failed to establish a factual basis for the rule.
  5. The rule is retroactive in purporting to invalidate all existing non-competition agreements, but the FTC has no authority to issue retroactive rules.

The ban sets a dangerous precedent for government micromanagement of business and can harm employers, workers and the economy, according to the Chamber of Commerce.

“The Federal Trade Commission’s decision to ban employer noncompete agreements across the economy is not only unlawful but also a blatant power grab that will undermine American businesses’ ability to remain competitive,” the Chamber stated in a press release. “Since its inception over 100 years ago, the FTC has never been granted the constitutional and statutory authority to write its own competition rules. Noncompete agreements are either upheld or dismissed under well-established state laws governing their use.”

The FTC on May 14 hosted an online compliance webinar providing an overview of the final rule and information on how to comply with the rule after its effective date.

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