Federal Judge Halts Implementation Of FTC Ban On Noncompete Agreements

A ruling by a judge on the Northern District of Texas will prevent the Federal Trade Commission’s (FTC) ban on noncompete agreements from being implemented.

The rule, which the Metals Service Center Institute opposed and advocated against, was set to go into effect early this month. Noncompete agreements are an important mechanism to protect industry innovation and promote competition. With a ban, employees would have seen fewer opportunities and reduced investments in company-based education, training, and development.

The judge’s ruling applies across the nation. The FTC cannot enforce this rule against any employer.

As Connecting the Dots explained in the past, this rule would have banned nearly all new noncompete agreements, or provisions in contracts that prohibit workers from pursuing certain employment after their term of service with an employer ends. In addition to barring companies from using these provisions in the future, the regulation would have required employers to throw out existing agreements and to notify current and former workers that they will not be enforced.

With the judge’s ruling, businesses can continue enforcing noncompete agreements subject to state law. Be mindful, however, that ruling does not prevent the FTC from examining these contracts on a case by case basis.

The FTC is likely to appeal the court’s decision to the Fifth Circuit Court of Appeals. If that challenge successful, it could possibly lead to a challenge before the U.S. Supreme Court.

While this issue progresses through the courts, companies should continue assessing the legal risks of enforcing noncompete agreements especially since, according to the Economic Innovation Group, at least 33 states have restricted the use of noncompete agreements in some industries. Venable LLP offers additional guidance at this link.