Federal Court Temporarily Halts Noncompete Agreement Ban

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Key Points to Know

• A federal judge invalidated the Federal Trade Commission’s rule that sought to prohibit noncompete clauses in employment agreements.
• The proposed ban would have prevented companies from restricting former employees’ job mobility or entrepreneurial ventures.
• Legal experts suggest the FTC faces significant challenges if it appeals the decision.
• This ruling marks another legal hurdle for the Biden administration’s efforts to implement federal regulations favoring workers and consumers over businesses.

For now, noncompete agreements remain enforceable following a federal court ruling.

On Tuesday, Judge Ada Brown of the Northern District of Texas overturned the FTC’s rule that aimed to ban most noncompete agreements starting September 4. This decision could lead to a high-profile legal battle in the Supreme Court if the FTC pursues an appeal.

Background and Developments

The FTC argued that noncompete clauses restrict workers from changing jobs or launching their own businesses, labeling them as anti-competitive and unfair trade practices. Approximately 30 million American workers—about one in five—are subject to such agreements.

The U.S. Chamber of Commerce, alongside Texas-based tax software company Ryan and two Texas trade organizations, challenged the rule, asserting the FTC exceeded its statutory authority. Judge Brown sided with the business groups, describing the rule as "arbitrary and capricious," and ordered it to be set aside.

Research from the FTC indicated that banning noncompetes could increase workers’ annual earnings by an average of $524 and stimulate the creation of 8,500 new businesses each year. Additionally, a Monster.com survey conducted in August revealed that 94% of workers support the ban.

This ruling represents the latest setback for President Joe Biden’s administration, which has faced multiple legal challenges against federal agency attempts to regulate in favor of consumers and employees.

Recent examples include a federal court blocking a CFPB rule limiting credit card late fees in May, and the Supreme Court overturning an EPA regulation in June, potentially affecting future federal regulatory efforts.

Looking Ahead: The Noncompete Ban Legal Battle

If the FTC appeals, the case will proceed to the 5th Circuit Court of Appeals and potentially the Supreme Court. Kevin Paule, a litigator experienced with noncompete cases, predicts the FTC will face an uphill battle.

“Given recent rulings on executive agency actions, it’s likely that courts will uphold the Texas decision, making it improbable that the Supreme Court will permit the FTC’s ban,” Paule told Investopedia.

Nonetheless, this does not grant businesses unrestricted use of noncompete agreements. Several states have imposed restrictions, and the FTC may still intervene in cases where agreements are deemed unfair or deceptive.

“While companies are not required to change their agreements immediately, they should consider alternative strategies to protect their interests beyond relying solely on noncompetes,” Paule advised.

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