Wealth management firms anticipating the need to eliminate non-compete agreements due to impending federal regulation can now feel reassured.
A federal judge in Texas has struck down the Federal Trade Commission’s rule, implemented in April, that sought to ban noncompete agreements across the board, which the FTC claimed affected nearly 20% of U.S. workers.
This ruling is particularly significant for the wealth management sector, where the competition for top talent is intense. Noncompete agreements are a key strategy for firms, especially in areas like private banking, to prevent rival firms from poaching their advisors.
Had the rule gone into effect on September 4th as planned, employers would have been required to inform employees under noncompete agreements that those restrictions were no longer enforceable.
The FTC had argued that noncompete agreements suppress wages, restrict worker mobility, and stifle entrepreneurship. The agency estimated that a ban on such agreements would result in the creation of over 8,500 startups annually.
The rule also targeted certain non-solicitation clauses that effectively functioned as noncompete agreements by hindering a worker's ability to find employment elsewhere, according to legal experts from Seyfarth.
However, Judge Ada Brown of the U.S. Court in Texas’ Northern District ruled that the FTC overstepped its authority in enacting the noncompete ban.
“The court concludes that the FTC lacks statutory authority to promulgate the Noncompete Rule, and that the rule is arbitrary and capricious,” Brown stated in her ruling. “Thus, the FTC’s promulgation of the rule is an unlawful agency action.”
Ryan LLC, a Dallas-based tax services firm, initiated the lawsuit, gaining backing from prominent business organizations like the U.S. Chamber of Commerce.
Brint Ryan, CEO of Ryan LLC, praised the decision for maintaining the integrity of countless employment agreements.
“Noncompetes are fundamental to the trust between employers and employees,” Ryan said, underscoring the importance of these agreements in business relationships.
Suzanne Clark, CEO of the U.S. Chamber of Commerce, also celebrated the ruling, calling it a “major victory in the Chamber’s fight against unnecessary government interference in business.”
“A broad prohibition of noncompete agreements by the FTC would have been an overreach that put American workers, businesses, and the economy at a disadvantage,” Clark added.
The FTC, however, has indicated that it is considering an appeal.
“We are disappointed by Judge Brown’s decision and remain committed to challenging noncompetes that restrict economic freedom, hinder growth, curb innovation, and suppress wages,” said FTC spokeswoman Victoria Graham. “We are actively considering the possibility of an appeal.”
Earlier this year, Evan Starr, a professor at the University of Maryland, told Barron’s that this case could potentially reach the Supreme Court.
Graham emphasized that the FTC could still pursue noncompete agreements through individual enforcement actions, despite the setback.
The FTC previously won a similar challenge to its noncompete rule in Pennsylvania, though a Florida court ruled against the agency in a separate case, limiting the impact of that decision to the specific plaintiff involved.
The FTC’s rule did not prohibit so-called garden-leave agreements, where an employee remains on payroll but inactive for a set period after departure, according to Seyfarth’s analysis.
Without a federal ban, noncompete agreements remain regulated at the state level. Some states, such as California and Minnesota, have outright bans, while others impose restrictions based on income levels or other criteria, as tracked by the Economic Innovation Group.
