Federal court blocks non-compete order, 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 (FTC) order that would have banned most noncompete agreements effective Sept. 4. The ruling by U.S. District Judge Ada Brown of the Northern District of Texas sets up a potential high-stakes legal battle at the Supreme Court if federal regulators appeal the decision.

What has happened so far?

The FTC has sought to block enforcement of employment contract provisions that prevented workers from changing jobs or starting their own businesses, calling them anticompetitive and unfair trade practices. About 30 million workers, or one in five Americans, have some form of noncompete agreement, the FTC said.

The U.S. Chamber of Commerce, a trade group representing businesses, sued along with Ryan, a Texas tax software company and two Texas trade groups to block the rule, arguing that the agency exceeded the authority granted to it by Congress. In the ruling, Brown sided with the business groups against the government.

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

An FTC study found that banning non-compete clauses would increase employee earnings by an average of $524 per year and lead to the creation of 8,500 new businesses per year.

Blocking noncompetes has also been popular among employees, according to a study released the same day as the ruling. A poll by job search site Monster.com in August found that 94% of workers supported the ban.

The court ruling was 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 authority of federal agencies, including the FTC and the Consumer Financial Protection Bureau, to enact regulations that favor consumers and workers over businesses.

In May, another federal court blocked a CFPB rule that capped late fees on credit card payments. In June, the Supreme Court struck down an Environmental Protection Agency rule in a ruling that could make it easier for opponents of a wide range of federal laws to challenge them in court.

What’s next with the non-compete lawsuit?

If the FTC decides to appeal the ruling, the case will go to the 5th Circuit Court of Appeals and then possibly to the Supreme Court. The federal agency likely faces a daunting task, said Kevin Paule, an attorney at Hill Ward Henderson who has handled noncompete cases.

“Given similar recent rulings involving enforcement agency actions, one would bet that the court would affirm what the Texas Supreme Court is doing, which means it is unlikely that the Supreme Court would allow the FTC to do so,” Paule told Investopedia.

That doesn’t mean companies have a green light for noncompete agreements in general, though — some states have enacted restrictions on noncompete agreements in recent years, and the FTC can still come down hard on individual cases where regulators find the agreements to be abusive or misleading.

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