Federal Court Blocks Noncompete Ban, For Now

Noncompete agreements in employment contracts are still allowed, at least for the time being, a federal court has ruled. 

A federal court on Tuesday struck down a Federal Trade Commission (FTC) rule that would have banned most noncompete agreements beginning Sept. 4. The ruling by Judge Ada Brown, a judge in the district court for the northern district of Texas, sets up a potential high-stakes legal battle in the Supreme Court, should federal regulators appeal the decision.

What’s Happened So Far?

The FTC had sought to block the enforcement of provisions in employment contracts that stopped workers from switching jobs or setting up their own businesses, deeming it an anti-competitive and unfair trade practice. About 30 million workers, or one in five Americans, have some sort of noncompete agreement, the FTC said. 

The U.S. Chamber of Commerce, a trade group representing business, had sued together with Ryan, a Texas-based tax software company and two Texas trade groups to block the rule. They argued the agency exceeded the powers granted to it by Congress. In the ruling, Brown sided with the business groups against the government.

“The Rule is arbitrary and capricious, the Court must ‘hold unlawful’ and ‘set aside’ the FTC’s Rule,” Brown wrote.

Research by the FTC showed banning noncompetes would boost workers’ earnings by an average of $524 a year and result in 8,500 new businesses being founded each year.

Blocking noncompetes was also popular with workers, according to a survey released the same day as the ruling. The poll by job search site Monster.com, conducted in August, showed 94% of workers supported the ban.

The court ruling was the latest legal setback for President Joe Biden’s administration. 

Federal courts and the Supreme Court have blocked several attempts by the White House to use the power of federal agencies, including the FTC and the Consumer Financial Protection Bureau, to make rules favoring consumers and workers over businesses.

In May, a different federal court blocked a CFPB rule limiting credit card late fees. In June, the Supreme Court overturned an Environmental Protection Agency rule in a ruling that could make it easier for opponents of many different federal regulations to have them tossed out in court. 

What’s Next For the Noncompete Ban Lawsuit?

Should the FTC decide to appeal the ruling, it would go to the 5th Circuit Court of Appeals and then possibly the Supreme Court. The federal agency would likely face an uphill battle, said Kevin Paule, an attorney at Hill Ward Henderson who has litigated cases involving noncompete agreements. 

“Based on similar recent rulings regarding actions by executive agencies, the betting line would be on the court affirming what the Texas Court does, meaning the Supreme Court’s unlikely to allow the FTC to do this,” Paule said in an interview with Investopedia.

However, that doesn’t necessarily mean businesses have the green light for noncompete agreements in general—some states have restricted noncompetes in recent years, and the FTC may still crack down on individual cases where regulators believe agreements were abusive or deceptive. 

“Companies and employers don’t have to do anything as of today or as of Sept. 4, but they may still want to give some thought as to how they want to craft their agreements and whether there’s a better way to protect their business interests than just relying on a noncompete,” Paule said.