It was the ban that wasn’t.
In April, the Federal Trade Commission issued a final rule that would have banned noncompete agreements—contractual deals that prevent workers from competing with their employer for a stated time after their employment.
The FTC argued that banning noncompetes would increase workers’ earnings by at least $400 billion in the next decade. Around one in five workers, or 30 million people, must sign noncompetes, according to the agency.
But then: It didn’t happen. A federal judge in Texas threw out the attempted ban in late August, not long before it was set to take effect on September 4.
Regardless of the fate of the ban, CFOs aren’t as concerned as they might eventually need to be. A joint poll from the CFO Leadership Council and CFO.com found a whopping 88% of CFOs expect the ban to have no impact on their personal career trajectory—but that was back in April, and even then, CFOs were more concerned when it came to retaining top finance talent. No matter the outcome, CFOs will be operating in a new environment for noncompetes, and compliance could be a concern.
Struck down. The presiding judge, Ada Brown of the US District Court for the Northern District of Texas, a Trump appointee, said in her ruling that the FTC overstepped its power. While the agency regularly targets individual industries with its rules, according to CNN, it’s less common for the FTC to attempt a rule like the noncompete ban, which would span multiple industries.
“The FTC lacks substantive rulemaking authority with respect to unfair methods of competition,” Brown wrote in the ruling. “The role of an administrative agency is to do as told by Congress, not to do what the agency think[s] it should do.”
That kind of strikedown wouldn’t have taken a fortune teller to predict. “If there’s one thing that I’ve learned in over 15 years of being a litigator, it’s that predictions are always going to get you in trouble,” Laura Smolowe, a partner at Munger, Tolles & Olson, told CFO Brew. “With that being said, I cannot say that I was remotely surprised at what happened.”
Sky’s the limit? At its most basic level, some critics thought the ban was too broad. Smolowe noted that the sheer breadth of the rule is ultimately what appeared “to make it very likely that it would be challenged, in that it applies to really everyone.”
While earlier drafts and proposed versions of the rule varied, the ban that would have gone into effect “applied even to senior executives, which had been the sort of the demarcation that had been made in an earlier proposed rule,” Smolowe clarified. “It was very clear, once we saw the proposed rule, that this was likely to be challenged, and then, in some ways, the final rule was even broader,” she said
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“You were going to get a lot of pushback on that right away, as with anything that brought in a lot of questions about whether the FTC had the authority to issue something that sweeping,” Smolowe added. “I think that’s in a nutshell what it was.”
Where does it leave us? The FTC could appeal—and that seems likely.
Following the Texas ruling, Victoria Graham, an FTC spokesperson, said the agency was “seriously considering a potential appeal,” adding that the decision “does not prevent the FTC from addressing noncompetes through case-by-case enforcement actions.”
Beyond the Texas case, “which is the big player because it was the nationwide injunction,” Smolowe pointed out, some other states, including Pennsylvania and Florida, have challenged the FTC’s final rule as well.
More broadly, states play a primary role in regulating noncompetes, according to the WSJ, and some have enacted their own outright bans in recent years. Minnesota did last year, and Oklahoma, California, and North Dakota also have bans.
“I do see a trend with increasing skepticism [about] noncompetes at the state level, but there are still plenty of states where they are legal, or they are legal in certain situations with sufficiently limited scope,” Smolowe continued.
“We don’t know what’s going to happen yet, is the bottom line, but I would personally be surprised if we didn’t see an appeal, and it’s certainly the kind of issue that could get to the Supreme Court,” she said. (And that’s a whole other story right now.)
The CFO equation. In any case, CFOs may need to simply accept a new environment for noncompetes.
Of course, “there are two aspects to that, when you’re talking about really senior executives,” Smolowe pointed out: “There’s their own mobility, and then there’s their decision-making as company leaders on what kinds of provisions they may or may not want in their own contracts.”
She continued: “For anyone who has a contract out there, the answer is that you have to talk to counsel about it,” considering the rules of the state where you’re operating and the specific details of the contract. “It’s really not one-size-fits-all, and a lot of the action is at the state level,” she added.
And “with more states passing some level of restriction on noncompetes,” she stressed that “companies need to be careful” in their approach. “If the ban does end up going into effect, which—who knows how likely that is at this point—but then people would have to do a significant rethinking,” she said.
Her overriding message? “Don’t forget about the states,” she stressed. “You can’t take from this lesson that noncompetes are fine because most of the action is on the state level, and that’s what I would say both to folks who have noncompetes and folks who may be thinking about what their own contracts look like.”