With the Demise of the Chevron Doctrine, Will the FTC’s Ban on Non-Competes Survive Judicial Review?

Employment Law

With the Demise of the Chevron Doctrine, Will the FTC’s Ban on Non-Competes Survive Judicial Review?

Jul 2, 2024 | Employment Law

On May 7, 2024, the Federal Trade Commission (“FTC”) published its final Non-Compete Clause Rule (“Final Rule”) making it an “unfair method of competition,” in violation of Section 5 of the Federal Trade Commission Act (“FTC Act”), for employers to “enter into non-compete clauses with ‘workers’” (includes both “employees” and “independent contractors”) after the effective date of the Final Rule, which is September 4, 2024. For worker non-competes entered into before September 4, 2024, those too are banned under the Final Rule, except for those with “senior executives,” a category restricted more or less to C-suite executives.

If the Final Rule survives judicial review (there are at least three lawsuits pending, including one filed by the U.S. Chamber of Commerce in the Northern District of Texas), it will effectuate a sea change in U.S. workplaces. By the FTC’s own estimate, more than one hundred million workers are currently covered by non-compete clauses.

I had the privilege of giving a virtual presentation recently to members of the Mount Vernon-Springfield Chamber of Commerce with my Bean, Kinney, & Korman colleague, and former MV-S Chamber Board Chair, Mark Viani. We covered a number of significant recent workplace changes, including the FTC’s Final Rule. The first question posed to us by an attendee, was what we thought the chances were that the Final Rule would pass judicial muster as it moves through the federal courts? The answer was a qualified, “no better than a 50-50 chance of survival” for the Final Rule.

However, that was before the U.S. Supreme Court’s decision last week to overrule the Chevron doctrine in Loper Bright Enterprises v. Raimondo. The odds that the Final Rule will ultimately survive judicial scrutiny are now much longer. Chief Justice Roberts, writing for a majority of the Court, relying on the Administrative Procedures Act, which requires courts to exercise their independent judgment in deciding whether an agency has acted within its statutory authority, concluded that courts may not defer to an agency interpretation of the law simply because a statute is ambiguous, overruling Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc. (“Chevron”).

It is fair to say that Chevron, decided back in 1984, has been a cornerstone of administrative law. Chevron has been used to allocate authority for statutory construction between courts and agencies in more than 17,000 federal court decisions, according to one estimate. Under Chevron’s two-step approach to judicial review of agency interpretations of law, the court first looks at whether Congress has directly spoken to the precise question at issue; if the intent of Congress is clear, the court must give effect to the intent of Congress, period. If, however, Congress has not directly addressed the precise question at issue, or the statute is silent or ambiguous, the court must defer to the agency’s interpretation of the statute, if it is reasonable or permissible, even if the court itself would come to a different conclusion.

With the Court’s decision in Loper Bright Enterprises, the balance of interpretative authority has shifted away from deference to executive branch agencies and back to the courts. The proper role of agency interpretations is to merely “inform” the judgment of the courts; it does not supersede that judgment. Relying on historic precedent, the Court majority concluded that in cases where a court’s own judgment differs from that of “other high functionaries” here, an Executive Branch agency, the court may not surrender, or waive, its judgment. The FTC’s statutory authority from Congress under the FTC Act for the Final Rule is anything but clear; it is mostly nonexistent. Moreover, the scope of the changes the Final Rule would effectuate is sweeping, potentially invalidating the non-competes of more than one hundred million U.S. workers.

Applying the “major questions doctrine,” a solid majority of the current Supreme Court decided in 2021, in West Virginia v. EPA, that agency statutory interpretations of vast economic and political significance will be overturned unless the agency has relied on clear statutory authorization from Congress. Again, there is little to no evidence here to suggest that Congress gave authority to the FTC under Section 5 of the FTC Act to regulate worker non-competes. Given the economic sweep of the Final Rule, the Supreme Court seems unlikely to acquiesce to the FTC’s interpretation of its authority under Section 5. The Final Rule could fail because of its remarkably broad scope.

Another strike against enforceability is that the FTC’s Final Rule can only be viewed as completely upending the existing “rule of law,” e.g., the long-standing and stable expectations of businesses about what federal law is around employee non-competes. The importance of settled legal expectations is a bedrock principle of American law and has been an important decisional tool for the Supreme Court in many instances.

With significant uncertainty now surrounding the enforceability of the Final Rule — but with a September 4, 2024, effective date still looming — are there proactive steps businesses should be considering? Yes. It is important for employers to begin considering their current reliance on, and future potential need to, restrict the ability of workers to engage in competitive activities both during and after termination of employment. For many employers, this should entail strengthening existing employee non-solicitation provisions and fine-tuning restrictions on confidentiality of business information, or implementing new ones where none are currently in place. Carefully drafted, employee non-solicitation and confidentiality restrictions are still likely to be enforceable, whether the FTC Final Rule ever becomes effective.

Finally, it is worth noting that even if the FTC Final Rule is deemed unenforceable, many businesses must still account for state laws restricting the use of non-compete provisions. Virginia, Maryland, and the District of Columbia all impose restrictions on employer use of non-competes, in particular for low wage workers.

We will be providing more updates regarding the FTC’s proposed rule on non-competes. If you have questions about your current policies and practices to ensure compliance with it or existing Virginia, Maryland, or District of Columbia employment laws, please contact Doug Taylor, at rdougtaylor@beankinney.com or (703) 525-4000.

This article is for informational purposes only and does not contain or convey legal advice. Consult a lawyer. Any views or opinions expressed herein are those of the author and are not necessarily the views of any client.

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