A few short weeks before the U.S. government’s ban on noncompete clauses in workplace contracts was set to take effect, a federal judge in a Texas court blocked it. The judge quickly reversed the initial mix of excitement and controversy that rippled across many industries in April when the Federal Trade Commission (FTC) voted to make noncompetes unenforceable in most cases. Now, employees, HR departments and business leaders are having a bit of whiplash trying to determine what just happened and where the FTC noncompete ban is headed next.
For those who aren’t part of the 30 million Americans bound by one, a noncompete is a clause in an employment contract preventing employees and freelancers from working for competing companies. Sometimes, this is only during their current employment with their original employer, but other times, it spans many years after they have stopped working there.
Judge Ada Brown of the U.S. District Court for the Northern District of Texas decided that the FTC had overstepped its authority and that it “lacks substantive rulemaking authority with respect to unfair methods of competition.” The U.S. Chamber of Commerce called the decision a “significant win in the Chamber’s fight against government micromanagement of business decisions.”
FTC noncompete ban: What happens next?
Some think that the FTC noncompete ban would protect workers from unnecessarily being restricted in their career opportunities. The FTC’s stance that noncompetes harm workers, with just a few exceptions, is an opinion shared with a few states that already ban noncompetes, such as California and Minnesota. Other states have restrictions on them but not a full ban. Without Brown’s decision, the federal ban would have gone into effect on Sept. 4, 2024.
“This decision is obviously a huge disappointment for employees who are subject to a noncompete. The terms of their existing noncompetes will remain in effect, subject to any changes to their state’s laws governing noncompetes,” says Peter Rahbar, an employment attorney and founder of The Rahbar Group PLLC in New York.
In the months since the FTC announced its decision, some companies across industries have prepared revised contracts ahead of Sept. 4. Others took a less hurried approach.
“Many companies were being advised by their lawyers to wait and see what happens with the court cases. This was happening for two reasons. First, most lawyers who practice in this area were expecting the injunction to be issued given the scope of the rule and the recent Supreme Court decisions limiting administrative agency rulemaking powers,” Rahbar says. “Second, the rule did not contain a significant enforcement mechanism, with penalties, for not providing notice to employees that their noncompetes were no longer valid.”
The FTC could appeal the decision
The FTC shared its “disappointment” in the decision, Bloomberg Law reports, announcing that the FTC is “seriously considering” a potential appeal. The FTC website continues to promote the potential benefits of a noncompete ban, which include up to $194 billion in reduced health care costs, a 2.7% increase in the rate of new business formation and a rise in innovation, including up to 29,000 more patents each year. Additionally, it predicts up to $488 billion in increased wages for workers over the next decade. The website also states that the judge’s decision doesn’t stop the FTC from addressing noncompete issues on a case-by-case basis.
Rahbar shares that the next presidential election will reveal what’s next for this clause. “The FTC rule will be tied up in litigation for years to come. If Trump wins the election, it will surely be withdrawn altogether,” he says. But he does expect individual states to continue to push for bans, limits, legislation and changes, “particularly for lower-income workers.”
“Legislators have seen that this issue is extremely important to, and popular with workers. Of the 26,000 comments the FTC received on this rule, over 25,000 were in support of the ban,” he adds.
Tom Spiggle, a Virginia-based employment lawyer, founder of The Spiggle Law Firm and author of Fired? Afraid You Might Be?, agrees that the future president’s input will matter and says the case might even make its way to the Supreme Court. “I think we can expect this FTC rule to be halted for many months, possibly years, while this matter works its way up to SCOTUS. If I had to bet, though I am no fan of noncompetes, I would put my money on SCOTUS ultimately striking down this rule.”
What individuals and companies can do in the meantime
As the FTC shared, those negatively impacted by noncompetes still have some potential recourse on a case-by-case basis. “Courts can and often do find that noncompetes are overbroad. If an employee feels stuck with a noncompete, talking to an employment lawyer is a good idea,” Spiggle says.
For companies looking to avoid the whiplash of the ongoing decision-making process at multiple levels, Spiggle has advice: “A move away from relying on noncompetes can still be a smart move for a company, especially given there are other tools [for] a company to use, like nonsolicitation agreements and trade secret protections, that can achieve the same protections.”
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