On the issue of noncompetition agreements, it is back to the drawing board for the Federal Trade Commission thanks to a resounding defeat in the court system that nixed a rule set to take effect last month.
Yet, a return to the status quo ante seemed to come as no surprise to employment attorneys in the Carolinas.
“My sense at the time was that the proposed rule was going to get knocked down,” said Will Oden III, a North Carolina lawyer for Ward and Smith in Wilmington. “My personal opinion was that the FTC does not have the rulemaking authority to take the action that they took.”
A late August ruling by Judge Ada Brown, of the federal Northern District of Texas, arrived at a similar assessment and effectively killed — at least for the moment — the FTC’s attempt to ban most noncompete covenants, a longstanding but sometimes controversial condition of employment for millions of American workers — particularly those in high-skilled or managerial roles.
As the FTC mulls its next move, attorneys in North Carolina and South Carolina say that the chances for its proposed ban in the higher courts seem dubious at best but also stress that noncompetes might still face challenges and shouldn’t be overused as a one-size-fits-all solution.
Implement but not interpret
There are two other federal cases in Florida and Pennsylvania dealing with the FTC rule, but Texas is the one that has generated the most attention and seems to have the widest ramifications as it has effectively put the rule on hold nationwide. An appeal from the district level in the Lone Star State would face what many suspect to be a chilly reception by a conservative 5th Circuit panel thought to be unfriendly territory for the federal regulatory body.
An eventual ticket to the Supreme Court docket also is possible, especially if there is a split among circuits. But the FTC’s prospects remain uncertain there as well in the wake of the high court’s recent decision to overturn the landmark Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc. case, a Reagan-era precedent that gave considerable leeway to federal regulators. The post-Chevron dynamic means that those enforcing federal guidance must adhere more strictly to their mandate than in past decades.
“They can implement a statute, but they cannot come in and interpret it,” Greensboro attorney D. Beth Langley, of Brooks Pierce, said. “This is, I would say, an extension of that issue of just what is the authority that a federal agency has in rulemaking.”
Langley said that she believed it was a “50/50 shot” that there might be a split between circuits. If so, the path becomes murkier and more speculative, but some feel that the Supreme Court’s 6-3 conservative majority that sounded the death knell of Chevron may also prove a tough sell for expansive FTC discretion.
“The current composition of the Supreme Court is scrutinizing agency actions really closely,” Langley said.
Instead, Langley said, most attempts to hammer away at noncompetes are being found outside of Washington.
“There really is kind of a patchwork going on at the state level,” she noted. “To some degree, there always has been. Each state has its own requirement for enforceability of noncompetes. North Carolina has not addressed that issue statutorily in a really long time.”
Hearts in right place
No action appears to be on the immediate agenda in South Carolina either. Columbia attorney J. Paul Porter, of Cromer, Babb & Porter, isn’t holding his breath that anyone inside the Beltway may act.
“It will be interesting to see if there is a groundswell that carries over into Congress to legislate in this area, but that seems awfully far-fetched,” he noted. “They can’t even fix daylight saving time much less change noncompete laws.”
Still, Porter, who is certified by the South Carolina Supreme Court as a labor and employment specialist, feels that the issue has the potential to bridge gaps between regulation-friendly Democrats and business-friendly Republicans.
“From a conservative free market standpoint, you want competition,” he noted. “You want employees to compete for better wages and better terms and conditions of employment.”
Porter said he supports rules on noncompetes and believes the FTC’s “hearts are in the right place” but was not surprised to see the District Court enjoin the rule given the FTC’s ambitious reach and broad “pie-in-the-sky” approach.
He pointed to states such as Massachusetts as examples where lawmakers have crafted strong regulations at the state level to hit back against noncompetes, which he feels can be unfair to workers — particularly those at the lower end of the economic scale.
“I’ve seen cases where an employee making less than $40,000 a year was bound by a noncompete agreement,” he said, “and that agreement had a fee-shifting provision so that employee — if they dared to challenge the enforceability of the noncompete agreement — ran the risk of having to pay the employer’s attorney fees.”
Agreement alternatives
Income thresholds are a common place where noncompete regulations tend to draw lines. However, state courts can often make their own decisions based on the reasonability of such an arrangement.
“In both North and South Carolina, it can be quite difficult to enforce a noncompete agreement,” Jonathan Crook, a Charlotte attorney with Fisher Phillips, said, “because courts these days really do scrutinize them very carefully to ensure that they are necessary to protect a legitimate business interest.”
Crook indicated that, while the FTC’s attempt to change the rules might have gone back to square one legally, it doesn’t mean there was no effect.
“There is no denying that this whole saga has raised the profile of the issues that the FTC was citing in support of their ban,” he said. “These are things that are going to be argued before courts as well. We are seeing that, even though the ban is not in effect, there are parties that are articulating some of the public policy concerns that the FTC was citing in litigation.”
Crook said that, when a client approaches him to ask about a noncompete, he feels it is important to ask questions and determine exactly what interests the client is trying to shield and whether other, less drastic, means of doing so might be preferable. Confidentiality agreements, nonsolicitation provisions or nonrecruitment pacts might achieve the desired end — and attract less litigation.
“Courts recognize that, because they are less restrictive than noncompetes, they can also be a little bit broader,” he said.
Langley said that, in North Carolina, courts often look at issues such as whether a noncompetition agreement is reasonable as to time and territory and whether some kind of consideration, such as additional money or a new job offer, was made to compensate the worker. A worker’s level in the company also can make a difference.
“Our judges do a good job of not having overbearing noncompetes imposed on rank-and-file employees,” Langley said.
Case-by-case action
More to the point, the threat of action from Washington, D.C., hasn’t abated either.
“I think the reality of it is that courts in the Carolinas are scrutinizing these more heavily because they think there might be federal legislation coming,” Charlotte lawyer Meredith Jeffries, of Alexander Ricks, said.
No matter what happens, Oden points out that regulatory agencies aren’t helpless. Even without a broad mandate, the FTC could act against employers in particular cases.
“The FTC still maintains the right to pursue individual enforcement actions on a case-by-case basis, even if the rule is not in effect,” he said.
Oden said the upcoming election could play a role as well. A possible change in presidential administrations might bring a corresponding shift in regulatory priorities at the FTC.
Still, the commission isn’t the only federal entity that might come knocking at the door over a noncompete agreement.
“The [National Labor Relations Board] does not like them at all,” Jeffries said. “People haven’t paid as much attention to the NLRB ruling. Most of the focus has been on the FTC rule.”
The NLRB issued recent findings that indicated a degree of suspicion toward noncompetes, feeling that they may sometimes violate the National Labor Relations Act by preventing employees from engaging in protected activity.
“The general counsel explained in their memorandum that, in some situations, a noncompete can interfere with that ability because it prevents the employee from carrying out a threat to quit in an effort to improve working conditions,” said Crook of Fisher Phillips.
Again, that might make instruments such as nonsolicitation arrangements a safer and more enforceable option.
“Customer-based restrictions don’t really interfere with those rights at all because they are not related to the protected activity that is at the heart of the act,” Crook said. “So, we have an advice memorandum that seems to indicate that customer nonsolicitation provisions are not in the crosshairs of the NLRB but noncompete agreements and employee nonrecruiting provisions might well be.”
None of the attorneys indicated that any action was imminent — or even contemplated — by the legislature in either North Carolina or South Carolina, although some felt that unspecified future legislation couldn’t be ruled out.
“I think it is unlikely that North Carolina or South Carolina would pass a complete ban on noncompetes,” Jeffries said. “Now, I wouldn’t be surprised — as some states do this more and more — to see some sort of limited preclusion.”
Jeffries also said that the Florida case has now been appealed by the FTC.
Whatever the case may be, Oden doesn’t feel the matter is dead even if the commission’s rule might be.
“It’s been an issue for the 20 years I’ve practiced,” he said. “I think it is going to continue to be an issue.”