Earlier this month, a federal judge in Texas blocked a Federal Trade Commission rule that would ban employers from having workers sign non-compete agreements. The rule was set to go into effect on Sept. 4.
About the Rule
In April, the FTC issued the final rule to promote competition by banning noncompete clauses across the United States. This was intended to protect the fundamental freedom of workers to change jobs, increase innovation and foster new business formation. The FTC described noncompetes as a widespread, “often exploitative” practice that imposes contractual conditions to prevent workers from taking a new job or starting a new practice. Because of this, noncompetes often force workers to stay in a job they want to leave or bear other significant harms or costs.
An estimated 30 million workers—nearly one in five Americans—are subject to a noncompete, the commission reports. Under the new rule, existing noncompetes for most workers would no longer be enforceable after the rule’s effective date.
However, existing noncompetes for senior executives (approximately less than 0.75% of workers) could remain in force, according to the FTC. Senior executives are defined as workers who are in policy-making positions and earn more than $151,164 annually. That said, employers were also banned from entering into or attempting to enforce any new noncompetes, even if they involve senior executives. Employers would also 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 noncompetes against them.
Additionally, the commission eliminated a provision in the proposed rule that would have required employers to legally modify existing noncompetes by formally rescinding them. That change would reportedly help to streamline compliance.
The commission estimated that the final rule will lead to new business formation growing by 2.7% each year, resulting in more than 8,500 new businesses created. Additionally, it is expected to result in higher earnings for workers, estimating $524 in increased earnings for the average worker per year and lowering health care costs by up to $194 billion over the next decade. The final rule was also expected to help drive innovation, leading to an estimated average increase of 17,000 to 29,000 more patents each year for the next 10 years.
Latest Ruling
U.S. District Judge Ada Brown explained in her ruling that the FTC does not have the authority to ban practices it deems unfair methods of competition by adopting broad rules.
“The Court concludes that the FTC lacks statutory authority to promulgate the Non-Compete Rule, and that the Rule is arbitrary and capricious. Thus, the FTC’s promulgation of the Rule is an unlawful agency action,” Brown wrote in her order. “(The rule) is hereby SET ASIDE and shall not be enforced or otherwise take effect on September 4, 2024, or thereafter.”
Brown said that even if the FTC had the power to adopt the rule, the agency had not justified banning virtually all noncompete agreements.
“The Commission’s lack of evidence as to why they chose to impose such a sweeping prohibition … instead of targeting specific, harmful non-competes, renders the Rule arbitrary and capricious,” Brown wrote.
Brown had also temporarily blocked the rule last month while she was considering a bid by the U.S. Chamber of Commerce and tax service firm Ryan to strike it down entirely.
“We are disappointed by Judge Brown’s decision and will keep fighting to stop noncompetes that restrict the economic liberty of hardworking Americans, hamper economic growth, limit innovation, and depress wages,” FTC spokesperson Victoria Graham said. “We are seriously considering a potential appeal, and today’s decision does not prevent the FTC from addressing noncompetes through case-by-case enforcement actions.”
“Special interests and big corporations worked together today to prevent nearly 30 million hardworking Americans from being able to get better jobs or start small businesses,” said Press Secretary Karine Jean-Pierre in a statement. “The Biden-Harris Administration will keep fighting to empower workers to choose where they work, to start a business, and to get the pay they deserve, and continues to support the Federal Trade Commission’s ban on noncompete agreements.”
Meanwhile, the U.S. Chamber of Commerce reportedly celebrated the ruling.
“This decision is a significant win in the Chamber’s fight against government micromanagement of business decisions. A sweeping prohibition of noncompete agreements by the FTC was an unlawful extension of power that would have put American workers, businesses, and our economy at a competitive disadvantage,” Chamber President and CEO Suzanne Clar said.
