Federal judge strikes down ban on noncompete agreements
A federal judge for the North District of Texas on August 20 stopped a U.S. Federal Trade Commission (FTC) rule banning nearly all noncompete agreements from taking effect.
Noncompetes are employment agreements that prohibit workers from leaving an employer and going to work for a competing business or launching a competing business of their own.
In Ryan, LLC v. Federal Trade Commission, U.S. District Judge Ada Brown said the FTC, which enforces federal antitrust laws, does not have the authority to ban practices it deems unfair methods of competition by adopting broad rules.
Rule background
In January 2023, the FTC proposed a rule generally prohibiting employers from imposing noncompetes on their workers. In the 15 months that followed, the federal agency received more than 26,000 comments on the proposed rule, with more than 25,000 of those comments supporting the proposed ban. On April 23 the FTC narrowly voted to approve a final rule banning nearly all noncompete agreements. That rule had been set to go into effect September 4.
FTC statistics on noncompetes
The FTC estimates that 18 percent of U.S. workers are covered by noncompete agreements, which adds up to about 30 million people.
What the rejected rule said
Under the thwarted rule, employers would have been required to provide notice to current and former workers (other than senior executives) who were bound by an existing noncompete agreement that they would not be enforcing any noncompetes against them.
The FTC had also outlined alternatives to noncompetes that enable employers to protect their investments without having to enforce a noncompete. These alternatives include trade secret laws and non-disclosure agreements (NDAs) which both provide employers with ways to protect proprietary and other sensitive information. The FTC estimates that more than 95 percent of workers with a noncompete already have an NDA.
The FTC also stated that instead of using noncompetes to lock in workers, employers that wish to retain employees can compete on the merits for the worker’s labor services by improving wages and working conditions.
FTC response
As a result of the court’s decision, the FTC won’t be able to enforce its rule, however, a spokesperson for the FTC said the agency could still address noncompete agreements through “case-by-case” enforcement actions, and the agency is also considering appealing the court’s decision.
Key to remember: The Federal Trade Commission rule banning almost all noncompete agreements was struck down in federal court and will not take effect on September 4 as scheduled.