FTC Ban on Non-Compete Agreements Blocked: What Employers and Businesses Need to Know

A federal judge in Texas struck down the Federal Trade Commission’s new rule banning non-compete agreements just weeks before the ban was scheduled to go into effect. The ruling leaves employers across the country breathing a sigh of relief. Companies large and small have grown to rely on the agreements to protect trade secrets along with their investments in recruiting and training. Here’s what employers need to know about the ruling and the ban.

The Ruling

U.S. District Judge Ada Brown in Dallas ruled that the FTC does not have the power to place such a ban, and even if it did, the commission’s move to end all such agreements was not justified. The ruling cited the proposed ban’s one-size-fits-all approach as unjustified.

“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,” wrote Brown.

The decision puts the new rule, which was set to take effect on September 4, on hold, though the FTC is likely to appeal.

Background: What is a Non-Compete Agreement?

Non-compete agreements prohibit employees for a period of time from going to work for competitors or starting their own businesses that would compete with a former employer. Companies began using the provisions to keep high-level executives from giving away trade secrets, or taking away clients and sales leads. But non-compete agreements have become common for employees at all levels, including among retail and fast-food chains that don’t want staff to jump ship when the competitor across the road suddenly offers a higher wage.

According to the FTC, about 30 million workers, or one in every five, are subject to non-compete agreements.

The Arguments

The FTC argues that non-compete agreements harm competition and innovation, and work to stifle wage growth. The agreements were originally used among top executives to protect trade secrets, but over time companies of all sorts began using them to keep employees from defecting to competitors.

The FTC maintains that banning non-competes would generate thousands of new businesses annually, boost innovation, raise workers’ wages, and lower healthcare costs. The commission says non-competes exploit workers, forcing them to stay in jobs they don’t want, relocate, or accept other unwanted conditions. 

Proponents of the change cite many arguments, including the need to protect trade secrets and their investment in recruiting and training employees. On the legality of the rule, proponents argue the FTC is overstepping its authority, and that the Constitution gives Congress the power to regulate matters affecting interstate commerce and not the executive branch, which the FTC belongs to. Others argue that the blanket, one-size-fits-all ban on all types of employees and all types of businesses would be harmful to many companies.

The Texas Case

Brown’s ruling came in one of several cases challenging the proposed ban. The case was brought by the US Chamber of Commerce and a Texas employer, Ryan Tax Firm. Brown temporarily blocked the rule in July while she considered arguments.

In her decision, Brown laid out two main arguments. First, she ruled that the FTC did not have the authority for such a ban. “The role of an administrative agency is to do as told by Congress, not to do what the agency thinks it should do,” she said.

Second, she called the ban “arbitrary and capricious,” saying its one-size-fits-all approach went overboard.

A Nationwide Ban on Bans

Importantly, Brown concluded her ruling should apply nationwide and to all employers. That ends speculation caused by similar challenges in courts in Pennsylvania, Florida, and elsewhere. And it leaves employers to follow existing state laws on non-competes.

The Ban’s Future

The FTC may appeal Brown’s ruling, and it may also seek an emergency order from the appellate court to make the rule take effect September 4 as scheduled.

Legal experts note that an appeal would be heard by the 5th Circuit Court of Appeals, which is notoriously business-friendly, and an appeal beyond that would of course go to the conservative US Supreme Court, which recently has aimed at government regulatory agencies.

The whole situation is further blurred ahead of the November election.

What Should Companies Do Now?

For the moment, we are back to the status quo, where non-competes are regulated on the state level. Still, employers should keep an eye on the FTC’s next moves, if any. Ludwin Law Group is continuing to monitor the Texas case and other challenges.

And while the proposed ban has everyone’s attention, companies would do well to seize the opportunity and review their existing non-compete and non-disclosure agreements to (1) ensure they are tailored to their particular state’s laws, and (2) narrow conditions of non-competes, non-solicitation, and non-disclosure agreements as much as possible. Even if the FTC’s rule has been shut down for good, many states are moving in the direction of limiting the use of non-competes. The FTC’s move was the result of legitimate problems.

Moreover, the FTC is not giving up, and it is still planning to carry out targeted investigations. “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,” wrote FTC spokesperson Victoria Graham in a statement.

So while employers can relax for the moment, it’s essential to continue monitoring the situation.