A sweeping rule by the U.S. Federal Trade Commission that would have banned most noncompete clauses in work contracts was struck down by a U.S. district judge in Texas on Tuesday, who said the FTC does not have the authority to ban such practices.
The decision by Judge Ada Brown, seated in Dallas, was not necessarily a surprise.
The potential FTC rule, which was announced in April and originally scheduled to go into effect Sept. 4, had come under the criticism since the day it was announced — with some questioning the merits of the rule and others questioning whether the FTC had the ability to make it.
Brown had temporarily blocked the rule in July, while she considered an appeal from the U.S. Chamber of Commerce.
Brown, in her ruling, said that, even if the FTC had the power to adopt the rule, the agency had not justified banning virtually all noncompete agreements.
“The court concludes that the FTC lacks statutory authority to promulgate the noncompete rule, and that the rule is arbitrary and capricious,” she wrote. “Thus, the FTC’s promulgation of the rule is an unlawful agency action.
“(The rule) is hereby SET ASIDE and shall not be enforced or otherwise take effect on September 4, 2024, or thereafter.”
FTC spokesperson Victoria Graham said the agency was considering an appeal or other action.
“Today’s decision does not prevent the FTC from addressing noncompetes through case-by-base enforcement actions,” Graham said in a statement.
Noncompete clauses, already difficult to enforce, aim to prevent employees jumping to rival companies or launching competing businesses.
The FTC ban would not necessarily have forbidden non-compete clauses for those who make more than $150,000 and are in key roles.
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ROI-NJ has spoken with numerous top employee attorneys regarding the potential ban on noncompete clauses in contracts:
- In dramatic ruling, FTC votes to void noncompetes
- N.J. lawyers express concern — and caution — over proposed rule on noncompete clauses
Noncompete clauses, however, are not just for top-paid employees.
It is believed that approximately 1 in 5 employees in the country (roughly 30 million people) works under a noncompete agreement.
These agreements are more extensive and pervasive than many realize. They are not just for high-level employees. Increasingly, they have been used to prevent hourly workers from changing jobs.
A 2021 study by the Federal Reserve Bank of Minneapolis found that more than 1 in 10 workers who earn $20 or less an hour are covered by noncompete agreements.
Job changes — at all levels — are a time when workers often get their biggest pay increases.
Opponents of noncompete clauses said they prevent people from being able to better market their skills, holds down wages and hinders entrepreneurial efforts.
Business groups argued the opposite. They said eliminating noncompetes would make them unable to protect their intellectual property.
