Federal Judge Partially Blocks U.S. Ban on Noncompetes

Federal Judge Partially Blocks U.S. Ban on Noncompetes

A federal court in Texas has partially blocked the U.S. government’s ban on noncompete agreements, which was set to take effect on September 4. The ruling came after Ryan LLC, a Dallas-based tax services firm, filed a lawsuit challenging the Federal Trade Commission’s (FTC) decision to ban noncompetes for almost all U.S. workers.

Judge Ada Brown of the U.S. District Court for the Northern District of Texas issued the ruling, postponing the effective date of the noncompete ban for the plaintiffs. In her decision, Judge Brown stated that the plaintiffs are likely to succeed on the merits of the case and that blocking the rule for now serves the public interest.

“While this order is preliminary, the Court intends to rule on the ultimate merits of this action on or before August 30, 2024,” Judge Brown wrote.

Ryan LLC’s lawsuit was supported by several major business organizations, including the U.S. Chamber of Commerce, Business Roundtable, and the Texas Association of Business. The firm argued that the FTC had overstepped its authority in deeming all noncompetes unfair and anticompetitive. Judge Brown concurred, stating, “The FTC lacks substantive rulemaking authority with respect to unfair methods of competition.”

Noncompete agreements are estimated to bind about 30 million American workers, ranging from minimum wage earners to CEOs, preventing them from joining competing businesses or starting their own. Ryan LLC contended that the ban would cause “serious and irreparable injuries” to its business by risking the loss of confidential information and enabling competitors to poach trained employees.

Across the country, many businesses have voiced opposition to the new rule. A similar case brought by ATS Tree Services, a Pennsylvania-based tree care provider, is scheduled for a hearing on July 10.

The FTC, on the other hand, has argued that noncompetes suppress innovation and harm workers. “The freedom to change jobs is core to economic liberty and to a competitive, thriving economy,” said FTC Chair Lina M. Khan when the proposed rule was first introduced. According to the FTC, the new rule could result in wage increases totaling nearly $300 billion per year and the creation of 8,500 new businesses annually.

The proposed ban includes an exception for senior executives with existing noncompete agreements, as these agreements are more likely to have been negotiated. The FTC estimates that less than 1% of workers would qualify as senior executives. Employers would be required to inform employees that existing noncompete agreements are no longer enforceable.

The Texas ruling is not the final word on the noncompete rule. The case is expected to continue through the appeals process, which could take months or even years.

At the Boyne Area Free Clinic in Michigan, medical director James Applegate supports the ban, arguing that noncompetes hurt patients by forcing doctors to leave the area. According to the American Medical Association, between 37% and 45% of doctors have signed noncompetes, which can prevent them from taking another job within a certain radius for a set period after leaving their employer.

On the other hand, Sarah Ruiz, owner of Sweet Tea Yoga in Georgia, worries that the end of noncompetes would jeopardize her business. After one of her teachers opened a competing studio nearby, she implemented a noncompete clause to protect her studio. Despite the potential changes, she remains hopeful and plans to discuss the situation with her teachers if the ban takes effect.

© TechMub. All right reserved.