A federal judge in Texas has blocked the Federal Trade Commission’s ban on non-compete clause from going into effect. On Tuesday U.S. District Judge Ada Brown ruled the FTC lacked the authority to issue the ban. It is important to note however that the lawsuit centered on the FTC’s ability to establish a nationwide ban. It does not challenge a states’ ability to regulate noncompetes.
Court Ruling on FTC Non-Compete Ban
Brown had temporarily blocked the rule in July for a small number of employers while she considered a bid by the US Chamber of Commerce and a tax service firm to strike it down entirely. Her ruling on Tuesday made it permanent and nationwide.
“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 in her ruling 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.
Victoria Graham, an F.T.C. spokeswoman, said the agency was disappointed by Judge Brown’s decision and would “keep fighting to stop noncompetes that restrict the economic liberty of hardworking Americans, hamper economic growth, limit innovation and depress wages.”
The FTC Plans to Challenge the Block on its Non-Compete Ban
“We are seriously considering a potential appeal, and today’s decision does not prevent the F.T.C. from addressing noncompetes through case-by-case enforcement actions,” Ms. Graham added.
The FTC approved the ban on noncompete agreements in a 3-2 vote in May. The commission and supporters of the rule say the agreements are an unfair restraint on competition that violate US antitrust law and suppress workers’ wages and mobility.
The Proposed FTC Ban on Non Competes
Under the FTC’s proposed rule, existing noncompetes for the vast majority of workers would no longer be enforceable after the rule’s effective date. Existing noncompetes for senior executives – who represent less than 0.75% of workers – would remain in force under the FTC’s final rule, but employers would have been banned from entering into or attempting to enforce any new noncompetes, even if they involve senior executives.
Last week, a federal judge in Florida ruled that the ban was likely invalid and blocked it from being applied to a real estate developer. But a judge in Philadelphia went the other way in July, finding that the FTC reasonably concluded that noncompetes are virtually never justified.
State Restrictions on Non-Compete and Non-Solicit Clauses
While the FTC rule has been blocked, employers still face restrictions on noncompetes at the state level. Enforceability of non competes has been a highly debated issue in recent years. Five states have fully banned non-compete clauses: California, Oklahoma, North Dakota, and Minnesota. And more states are considering passing restrictions
California, the largest economy in the United States, has banned all non-compete clauses since 1872, but recently passed legislation in September strengthening the ban to also apply to contracts signed outside of the state.
Massachusetts also passed legislation to restrict non-compete clauses in 2018, fully banning them for doctors, nurses, psychologists, social workers, broadcast industry workers, and lawyers. Many other states have imposed income restrictions. Colorado banned non-compete clauses in 2022 but left a carve-out for contracts for “highly compensated workers” —anyone making more than $112,500 in 2023.
Illinois Freedom to Work Act
In 2022, Illinois enacted the Freedom to Work Act planning a number of new restrictions on non-competition and non-solicitation clauses, including
- Employers cannot require employees with actual or expected annual “earnings” of less than $75,000 per year to sign a “covenant not to compete”. The earnings limit increases $5,000 every five years for the next fifteen years (to $80,000 in January 2027, $85,000 in 2032 and then to $90,000 in 2037). Previously the Act only prohibited restrictive covenants for employees who made less than $13.00 an hour.
- Employers cannot require employees with actual or expected annual earnings of less than $45,000 per year to sign a “covenant not to solicit”. The earnings limit increases by $2,500 every five years over the next fifteen years (to $47,500 in January 2027, $50,000 in 2032 and then to $52,500 in 2037).
- Covenants not to compete or not to solicit become void and illegal if the employer terminates, furloughs, or lays off the employee for reasons related to the COVID-19 pandemic.
- Makes a covenant not to compete void and illegal with respect to employees covered by a collective bargaining agreement under the Illinois Public Labor Relations Act or the Illinois Educational Labor Relations Act, and individuals employed in contracts. (There are exceptions for certain construction employees.)
Impact of Court Blocking FTC Ban on Non-Competes
So, while the FTC ban is blocked for now, employers cannot rest easy. Understanding state laws and restrictions on non competes are important for all employers. And there are likely more challenges to come. Employers need to:
- Review your non-compete and non-solicitation language to make sure you comply with the conditions of the Act.
- Review your policies related to who you require to sign non-compete and non-solicitations agreements to make sure you are not violating the Act.
Should you have any questions about non-compete or non-solicitation clauses or other restrictive covenants for your business or would like to schedule an initial consultation, please contact Navigant Law Group, LLC at (847) 253-8800 or email us at hello@navigantlaw.com.
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