On Tuesday, Judge Ada Brown of the U.S. District Court for the Northern District of Texas made a significant ruling that could have far-reaching implications for labor laws. She ruled that the Federal Trade Commission (FTC) cannot enforce its ban on noncompete agreements.
The rule was scheduled to take effect on Sept. 4 and targeted employment agreements that prohibit, penalize, or effectively prevent a worker from seeking or accepting work elsewhere or operating a business after leaving a particular job. Last month, the judge had partially blocked the rule by granting a preliminary injunction while considering whether to strike it down entirely.
In this week’s ruling, Judge Brown wrote that the FTC had overstepped its authority when it approved the “Noncompete Clause Rule” by a vote of 3-2 in April. “The FTC lacks substantive rulemaking authority concerning unfair methods of competition,” Brown wrote.
“The role of an administrative agency is to do as told by Congress, not to do what the agency think(s) it should do.”
Business groups, including the Big “I,” agreed with that assessment. They argued that Congress never intended to give the FTC such broad powers and questioned whether they possessed the statutory authority to promulgate such a rule.
In response, the FTC said it will continue to try to stop noncompete agreements. “We are seriously considering a potential appeal, and today’s decision does not prevent the FTC from addressing non competes through case-by-case enforcement actions,” said an FTC spokesperson.
According to the FTC, the new rule could lead to wage increases totaling nearly $300 billion per year and the creation of 8,500 new businesses once workers can freely pursue new opportunities without the fear of being taken to court by their employers.
The ban would carve out an exception for senior executives with existing noncompete agreements because these agreements are more likely to have been negotiated. The FTC estimates that less than 1% of workers would qualify as senior executives. Under the rule, existing noncompete agreements would not need to be formally rescinded, but employers would be required to inform their employees that they are no longer enforceable.
Companies opposing the ban argue that they need noncompete agreements to protect their business relationships, trade secrets, and investments in training or recruiting employees.
Aside from the Texas case, the legal landscape is further complicated by ongoing battles against the FTC’s ban on noncompete agreements. Companies have filed lawsuits in Florida and Pennsylvania to block the rule, adding to the complexity and interest to the issue.
In the Florida lawsuit brought by a retirement community, the court granted a preliminary injunction prohibiting the rule’s enforcement only for the plaintiff and not for any other company. In the Pennsylvania lawsuit, the court concluded that the plaintiff, a tree company, failed to show that the ban would irreparably harm it and that the company wasn’t likely to win the case
The divergent rulings mean the issue could end up working its way to the U.S. Supreme Court.
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Cited Resources
FTC Ban on Noncompete Agreements Struck Down
Aug 22, 2024
IA Magazine by: Nathan Riedel
FTC effort to ban noncompete agreements for employees rejected by federal judge in Texas
Aug 20, 2024
By: Alex Veiga, Associated Press
Federal judge throws out U.S. ban on non competes
Aug 21, 2024
Andrea Hsu
About the Author:
Jeannine Giesler, CISR, CPIA, and past President of the OIA Board of Directors, Foundation for the Advancement of Insurance Professionals, currently serves as Resource Center Advisor for the OIA. The purpose of the Resource Center is to contribute to building a comprehensive library of resource materials for our members. We pride ourselves on being the one-stop shop for all OIA members and work to solve every problem or situation you may come across.
