Players in the broker-dealer and investment advisor industries are among more than a hundred organizations and trade groups asking the Federal Trade Commission to “stay” its ban on almost all employee noncompete contracts while a legal challenge to the rule moves forward.
The rule against noncompetes was approved by the commission on April 23—and was immediately challenged the next day in a lawsuit filed by powerful business lobbies. The rule, set to go into effect September 4, would stop employers from entering into new noncompete contracts with workers on or after that date.
Noncompete contracts are among the tools employers use to make sure that their prized employees don’t take clients and business to other firms. Their critics say that these contracts harm workers’ ability to move and get the most money for their services.
The new rule also prohibits employers from enforcing existing noncompetes with workers other than senior executives, who are defined as those in “policy-making positions” who earn more than $151,164 annually. Under the rule, a firm must also notify current and former workers that noncompete contracts won’t be enforced.
The lawsuit against the FTC was brought by four plaintiffs: the U.S. Chamber of Commerce, the Business Roundtable, the Texas Association of Business and the Longview Chamber of Commerce. The four filed the suit in the U.S. District Court for the Eastern District of Texas, arguing in its complaint that the commission overstepped its authority by issuing the rule banning noncompetes, which is “an arbitrary and capricious exercise” of its power.
The plaintiffs, in addition to a group of more than 100 business organizations and trade groups, are asking the agency to use its authority to stay the implementation of the ban while the lawsuits proceed, according to a joint letter they sent to the commission on May 24.
Prudent Step
“A stay would be a prudent step,” the groups said in the letter. “The impending effective date of the noncompete rule and lack of commission guidance on key pieces of it—such as what it means to be in a policy-making position—is creating substantial uncertainty for businesses and employees around the country.” The loose-knit coalition includes the Investment Adviser Association and the Securities Industry and Financial Markets Association.
The coalition noted that the FTC had delayed other rules in the past when there was the possibility of them being misunderstood, specifically a new rule on auto dealers that was delayed in January. The groups cited that Administrative Procedure Act that gives the FTC and other agencies the right to postpone an effective date of action.
“A brief, voluntary delay would provide invaluable certainty as to the rule’s potential effective date and conserve significant resources,” the coalition said in its letter.
Although the noncompete rule’s legal fate remains in question, “it is already imposing significant costs and uncertainty on the U.S. economy,” including the legal costs for companies trying to protect their investments and intellectual property.
Nearly one in five workers in the financial services industry reports signing a noncompete agreement—a higher ratio than that found in construction, education or public administration, according to one Federal Reserve Bank estimate.
The FTC said the ban on noncompetes, were it to go into effect, would increase workers' wages between $400 billion and $488 billion over the next decade.
Since the noncompete contracts widely used by wirehouses often prohibit advisors from taking their books of business when they depart, the ban would remove the threat of lawsuits and could fuel the movement of advisors across channels and firms, recruiters predict.