The Federal Trade Commission’s nationwide ban on noncompete agreements will be delayed from going into effect following a ruling from a federal judge, reports Wealth Management.
The ban, which prohibits employers from enforcing noncompete clauses in most existing employment agreements and bans companies from including them in all future ones, was approved by the FTC in April and was to begin taking effect on September 4.
Last week Judge Ada Brown of the US District Court for the Northern District of Texas delayed implementation of the rule, writing, “While this order is preliminary, the Court intends to rule on the ultimate merits of this action on or before August 30, 2024.”
The FTC is thus blocked from enforcing the rule following a lawsuit filed by a coalition of business groups that include the U.S. Chamber of Commerce, the country’s largest business lobby, and tax service firm Ryan. They claimed that the FTC did not have the authority to adopt the ban and that Congress granted the agency only limited rulemaking powers. Their lawsuit asserted that the ban would invalidate 30 million employment contracts.
The groups will now attempt to overturn the FTC rule, and Brown said in her ruling that they are likely to succeed on the merits.
Under the FTC’s new rule, existing non competes for the vast majority of workers will no longer be enforceable after the rule’s effective date. Existing non competes for senior executives – who represent less than 0.75% of workers – can remain in force under the FTC’s final rule, but employers are banned from entering into or attempting to enforce any new non competes, even if they involve senior executives. Employers will be required to provide notice to workers other than senior executives who are bound by an existing noncompete that they will not be enforcing any non competes against them.
The FTC estimates about one in five American workers are bound by the non competes, and that the rule could lead to increased wages totaling nearly $300 billion per year by encouraging people to move to different jobs more freely.
“The FTC stands by our clear authority, supported by statute and precedent, to issue this rule,” said agency spokesperson Douglas Farrar. “We will keep fighting to free hardworking Americans from unlawful non competes, which reduce innovation, inhibit economic growth, trap workers, and undermine Americans’ economic liberty.”
In her ruling, Judge Brown said the FTC had not provided sufficient justification for its ban. “It imposes a one-size-fits-all approach with no end date, which fails to establish a rational connection between the facts found and the choice made,” the judge wrote.
“This ruling is a big win in the Chamber’s fight against government micromanagement of business decisions,” the Chamber of Commerce’s chief counsel Daryl Joseffer said in a statement. “The FTC’s blanket ban on non competes is an unlawful power grab that defies the agency’s constitutional and statutory authority and sets a dangerous precedent where the government knows better than the markets.”
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