As we previously reported, the FTC has proposed a rule that would ban most noncompetes. The public comment period has ended, so the FTC could issue the rule (or a modified version of the rule) any time. Any rule that the FTC issues will almost certainly be challenged in court.
If the FTC proceeds with issuing the rule, one of the key questions will be whether the courts will enjoin its enforcement until its validity is litigated. A recent case from the Fifth Circuit Court of Appeals provides some guidance on how the issue could be addressed.
If the FTC proceeds with its noncompete ban, will the courts enjoin enforcement until a final adjudication of the validity of the rule?
In Restaurant Law Center v. United States Department of Labor, US, No. 22-50145, WL 3139900 (5th Cir. Apr. 28, 2023), the Restaurant Law Center and the Texas Restaurant Association challenged a Department of Labor regulation that refines how the federal minimum wage applies to tipped employees.
The District Court denied the plaintiffs’ request for a preliminary injunction against enforcement of the rule. It was denied on the grounds that the plaintiffs failed to establish that companies, which would be required to comply with the rule while its validity was litigated, would suffer irreparable harm. The Fifth Circuit Court of Appeals disagreed and reversed. The appellate court held that under Fifth Circuit precedent, the non-recoverable costs of complying with a putatively invalid regulation typically constitute irreparable harm.
The cost of compliance while the validity of the rule is adjudicated
There can be no serious dispute that businesses across the country will incur significant, but non-recoverable costs of complying with the FTC’s noncompete ban if an injunction against its enforcement is not issued before the validity of the rule is ultimately adjudicated.
For example, the rule would require employers to notify employees that any noncompetes are no longer in effect. The proposed rule says this cannot be a mass communication but must be on paper or in a digital format. In addition, notice must be given to current and former employees. For some employers, this will involve substantial expense which would not be recoverable if the rule is found to be invalid.
In fact, the FTC’s Notice of Proposed Rulemaking explicitly acknowledges that employers will incur costs to comply. In addition, if workers are notified that their noncompetes are no longer in effect and the rule is found to be invalid, the confusion that would result would likely constitute irreparable harm to the employers.
In other words, you can’t put the proverbial toothpaste back in the tube. Once workers are notified that their noncompetes are invalid, they are likely to act accordingly and many of them will join or start competitors.
While the propriety of nationwide injunctions by the federal courts is regularly debated, under the rationale in Restaurant Law Center, justification appears to exist for a court to enjoin enforcement of the rule until the validity of the rule can be adjudicated. We will keep an eye on this development and report on any new developments if the rule is, in fact, issued by the FTC.
Benjamin Fink is known for his work in noncompete, trade secret and competition-related disputes. A shareholder at Berman Fink Van Horn, Ben concentrates his practice in business and employment litigation.
