ANALYSIS: Noncompete Ban Exposes Spat Over ‘Retroactive’ Laws

One of the first lawsuits challenging the Federal Trade Commission’s noncompete ban is poised to spark a fresh debate over the meaning of the word “retroactive.”

The FTC’s final rule, issued April 23, will ban nearly all noncompete agreements and void existing ones, except for those with senior executives. The Chamber of Commerce sued the next day, and among its many arguments is the allegation that the FTC’s retroactive rulemaking raises “serious doubts” under the US Constitution’s Fifth Amendment.

The Fifth Amendment doesn’t explicitly bar retroactive laws, but court precedent has long established that the retroactive application of a law would violate the amendment’s due process principle of fairness if it isn’t justified by a rational legislative purpose. Among the hurdles that the FTC will have to prove (such as its authority to make substantive rules like this in the first place), the agency may have to show that it has a rational basis for voiding nearly all existing noncompetes.

About 30 million workers are currently subject to a noncompete, according to FTC estimates.

The Chamber of Commerce cites US Supreme Court precedent in claiming that such a retroactive move would “deprive citizens of legitimate expectations and upset settled transactions.” In fact, in the 1998 case it cites (Eastern Enterprises v. Apfel), the court wrote that “this country’s law has harbored a singular distrust of retroactive statutes, and that distrust is reflected in this Court’s due process jurisprudence.”

But the FTC asserted in its April 23 rule that the near-total ban is not retroactive.

A rule isn’t “retrospective” merely because it applies to conduct predating the rule’s enactment or because it “upsets expectations based in prior law,” the agency claims in the supplementary information to its regulation, citing the 1994 Supreme Court case Landgraf v. USI Film Products. Rather, the FTC says, a rule is retroactive only if it changes the “past legal consequences” of a “past action,” while a rule that changes the “future effect” of a past action is not.

In other words, employers won’t get in trouble for having had a noncompete before the rule’s effective date—they’ll only get in trouble if they enforce it afterward. “No penalties attach to persons who entered non-competes before the effective date,” the FTC argues. And to “minimize concerns about retroactivity,” the rule says that it won’t apply to claims that accrued before the effective date—meaning that employers can still hold former employees accountable for not complying with a noncompete before the rule takes effect.

Defining ‘Retroactive’

Black’s Law Dictionary defines a “retroactive statute” as “a law that imposes a new obligation on past things or a law that starts from a date in the past.” The Supreme Court in Landgraf said that a retroactive law imposes new consequences on actions taken prior to the law’s enactment.

Landgraf also notes that “even uncontroversially prospective statutes may unsettle expectations,” such as a new gambling ban unsettling the expectations of a person who began to construct a casino. This doesn’t necessarily make such a statute retroactive; it just means that if the person operates the casino in the future, they could be held liable going forward.

The key in the FTC case may be whether the liability of an employer who continues to enforce a noncompete after the rule takes effect would qualify as a new consequence of a past action, or as a new consequence of a future action.

It’s notable that the Chamber doesn’t bring a cause of action specifically under the Fifth Amendment. Instead, the Chamber weaves its constitutional concern into its claim that the alleged retroactivity is “not in accordance with law,” in violation of the Administrative Procedure Act. A ruling on this issue, however, could influence how courts interpret retroactivity under the US Constitution in future cases.

As the case works through the courts, we may see more clarity around the meaning of a retroactive regulation. In the meantime, the noncompete rule is slated to take effect about four months from now, unless the Chamber or another plaintiff succeeds in stopping it.

Bloomberg Law subscribers can find related content on our In Focus: Noncompetes page and our Labor & Employment Practice Center.

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