On May 14, 2024, the NAM filed an amicus brief urging the Northern District of Texas to stay the FTC’s sweeping ban on noncompete agreements—a rule that threatens to hamstring innovation in the manufacturing sector and damage the competitiveness of American industry. In January 2023, the FTC proposed an across-the-board rule that would flatly prohibit employers, as an unfair method of competition prohibited under Section 5 of the Federal Trade Commission Act, from entering into a noncompete clause with a worker, and would also retroactively invalidate any existing noncompete agreements. The NAM opposed the rule as proposed, and submitted comments detailing the harms to manufacturers that would result. In April 2024, the FTC finalized a comprehensive noncompete ban with only two limited exceptions (for the sale of a business and for existing non-compete agreements with senior executives).
Ryan, a Texas accounting firm, sued the FTC in the Northern District of Texas, challenging the FTC’s authority to issue the rule and seeking a stay of the rule pending the district court’s decision on the merits. We argue in support of that stay that noncompete agreements are essential for protecting manufacturers’ trade secrets and other proprietary information. Effective protection for confidential commercial information is critical to maintaining incentives for manufacturers to make capital-intensive investments in R&D that ultimately power innovation and American economic competitiveness.
Our brief debunks the FTC’s assertion that trade secret misappropriation litigation and nondisclosure agreements are adequate alternatives for protecting companies’ proprietary information. Misappropriation suits are costly, slow and extraordinarily difficult to prosecute, requiring knowledge of a rival’s misappropriation by improper means. NDAs are similarly difficult to prove as there is no ready way to determine if the agreement has been breached, and litigation is slow and expensive. Further, the final rule’s “functional” definition of noncompete clauses will deem many—if not most—NDAs to be non-compete clauses, thus barring them wholesale. And both misappropriation litigation and NDAs function only retrospectively, attempting to compensate for detected and completed wrongdoing rather than preventing it in the first place. Although these concerns were raised by the NAM and many other commenters, the FTC failed to meaningfully respond to them. We argue, accordingly, that the agency acted arbitrarily and capriciously and that the final rule must therefore be set aside.