Federal Court blocks non-compete ban for now

Non-compete agreements in employment contracts are still allowed, at least for now, a federal court has ruled.

A federal court on Tuesday struck down a Federal Trade Commission rule that would have banned most non-compete agreements starting September 4. The decision by U.S. District Judge Ada Brown for the Northern District of Texas sets the stage for a potentially high-stakes legal battle before the Supreme Court if federal regulators appeal the ruling.

What happened so far?

The FTC has sought to block enforcement of employment contract provisions that prevent workers from changing jobs or starting their own businesses, arguing that they are an anticompetitive and unfair business practice. About 30 million workers, or one in five Americans, have some kind of noncompete agreement, the FTC said.

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

“The rule is arbitrary and capricious, the Court must ‘deem it unlawful’ and ‘vacate’ the FTC rule,” Brown wrote.

A study by the FTC found that banning non-compete clauses would increase workers’ incomes by about $524 per year and lead to the creation of 8,500 new businesses each year.

Blocking non-compete clauses has also been popular with employees, according to a poll released the same day as the decision. A poll by job search site Monster.com, conducted in August, found that 94 percent of employees supported the ban.

The court ruling is 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 establish rules that favor consumers and workers over businesses.

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

What’s next in the antitrust trial?

If the FTC decides to appeal the decision, it will have to go to the 5th Circuit Court of Appeals and then possibly to the Supreme Court. The federal agency will 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 decisions regarding executive agency actions, the bet would be that the Court upholds what the Texas Court is doing, meaning it is unlikely the Supreme Court will allow the FTC to do this,” Paule said in an interview with Investopedia.

However, that doesn’t necessarily mean companies have a green light for noncompete agreements in general: Some states have restricted noncompete clauses in recent years, and the FTC can still crack down on individual cases where regulators believe the agreements were abusive or deceptive.

“Businesses and employers don’t have to do anything as of today or September 4, but they may still want to think about how they want to craft their agreements and whether there is a better way to protect their business interests than simply relying on a non-compete clause,” Paule said.