Court hears third lawsuit against noncompete agreement ban

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NEW YORK — Another challenge to the Federal Trade Commission‘s ban of noncompete agreements was heard Wednesday, and the federal district judge involved said that the plaintiffs are likely to prevail.

The case arose in Florida, where the Properties of the Villages retirement community sued the agency.

The plaintiffs said that its sales associates’ lifelong relationships with residents of the community are central to its business model, and that it invests heavily in training of the associates, who sign a noncompete agreement. This requires them not to compete to sell homes in the 58,000-acre development for 24 months after leaving the company.

Lawyers for Properties of the Villages said in a hearing Wednesday that the FTC’s rule would have major economic consequences, and under the so-called “major questions” doctrine, Congress cannot delegate to executive agencies issues of major political or economic significance.

While stating sympathy for lower-wage workers caught in noncompete agreements, U.S. District Judge Timothy Corrigan said Properties of the Villages is likely to succeed in its argument that the FTC’s rule invokes the major questions doctrine.

He noted that the FTC, by one metric, estimates that employers will pay from $400 billion to $488 billion more in wages over 10 years under the rule.

“Suffice it to say that the transfer of value from employers to employees, from some competitors to other competitors, from existing companies to new companies and other ancillary effects will have a huge economic impact,” Corrigan said.

An attorney for the U.S. Department of Justice defended the FTC.

Congress intended for the agency to take action to prevent unfair competition, and all noncompete agreements are unfair, Rachael Westmoreland said.

“They restrict competition. That’s their entire purpose,” she said.

Corrigan granted a preliminary injunction in the case, prohibiting enforcement of the rule just for Properties of the Villages, until the case is resolved. His ruling did not apply to any other company, he said, and it will not stop the FTC’s rule from going into effect Sept. 4.

Other claims

Properties of the Villages’ lawsuit did not come in a vacuum.

In Texas, Ryan LLC, a tax services firm based in Dallas, has sued the FTC over the ban.

Business groups have voiced support for Ryan’s lawsuit, including the Society for Human Resource Management, which said the FTC rule is overly broad and would discourage employers from investing in training for workers if they could easily quit and take their knowledge elsewhere.

U.S. District Judge Ada Brown has ruled that Ryan and its co-plaintiffs, including the U.S. Chamber of Commerce, are likely to prevail in court and that the ban on noncompete agreements cannot go into effect for them until their case is resolved.

In Pennsylvania, ATS Tree Services sued the FTC, calling its proposed ban unfair and saying it usurps states’ authority to establish their own laws.

ATS said it makes employees sign noncompete agreements because it invests in specialized training for them, and it couldn’t afford to so if the employees could leave and immediately use that training and the company’s confidential information for a competitor.

But U.S. District Court Judge Kelley Hodge said the tree company failed to show it would be irreparably harmed by the ban and the company wasn’t likely to win the case.