August 21, 2024
Welp – it looks like we’re not going to get a ban on noncompete clauses after all.
That’s because the rule scheduled to take effect in early September was just struck down by a federal judge in Texas.
This is the third federal judge to rule on this case. One came from a federal judge in Pennsylvania upholding the ban on noncompetes and a second came from a Florida federal judge who ruled that the rule was overturned but only for the plaintiffs who were suing. But this ruling blocked the ban on noncompetes nationwide.
I have been telling you since last year that the Federal Trade Commission started the process of banning companies from forcing employees to sign new noncompete employment contracts and made existing noncompete contracts invalid. That rule would have impacted an estimated 30 million workers. For those who don’t know – lots of employees have to sign these noncompete contracts which prevent them from either taking another job with a rival company or starting a competing business. Sometimes noncompetes have a time limitation like – you can’t do either of those things for 2 years after you leave the company. A handful of states ban them and most states limit them in some way. But this rule – if it was allowed to take effect would have banned them nationwide.
Well the US Chamber of Commerce and several other business organizations sued and yesterday a Texas federal judge agreed with them saying two things – one – the FTC overstepped its authority to even create this rule and two – this rule is overly broad.
The FTC was arguing that under the power given to the agency by congress in the FTC Act of 1914 and expanded by congress in 1938 and in 1980, they had every single right categorize make noncompete contracts as ‘unfair methods of competition.”
The judge disagreed saying “the court concludes the FTC has some authority to promulgate rules to preclude unfair methods of competition. … however after reviewing the text, structure and history of the act, the court concludes the FTC lacks the authority to create substantive rules through this method.” Basically the judge says yes – congress gave the FTC power to make rules – but this one was too much.
The FTC says it based this rule on state laws that already ban non-competes. However the judge’s ruling says this rule goes too far because the evidence found by the FTC does not match the rule they created. She said “the rule is based on inconsistent and flawed empirical evidence, fails to consider the positive benefits of non-compete agreements and disregards the substantial body of evidence supporting these agreements.”
So what does this mean for you? If you live in a state with some form of restriction on non-competes those will stay. But if you don’t – and you currently have a noncompete, that will stand. And you can still be asked to sign a noncompete in a state that does not have restrictions them. The FTC says they are considering appealing the decision.
Read the Texas judge’s ruling here.
