Judge delays ban on noncompete agreements for small number of employers

New York (CNN) — A federal judge on Wednesday preliminarily delayed a ban on noncompete agreements from taking effect for a handful of employers on September 4.

Unless the judge makes another ruling to the contrary before that date, the ban on noncompete agreements will go into effect for the majority of companies in the US. But they will learn later this summer if that still holds.

“While this order is preliminary, the Court intends to rule on the ultimate merits of this action on or before August 30, 2024,” wrote Judge Ada Brown of the US District Court for the Northern District of Texas.

There is likely to be a concerted effort between now and the end of August to persuade the judge to block the ban nationwide, according to Jesse Coleman, a partner at the law firm Seyfarth Shaw in Houston, which represents SHRM, a human resource management association.

The ban, which prohibits employers from enforcing noncompete clauses in most existing employment agreements and bans companies from including them in all future ones, was approved by the Federal Trade Commission in April.

Within a day of the FTC approval, the agency was sued by Ryan LLC, a tax services and software provider based in Texas, and, separately, by the US Chamber of Commerce and other business groups.

Wednesday’s order limits the preliminary injunction to just the plaintiff (Ryan LLC) and the plaintiffs-intervenors, which are the US Chamber of Commerce, the Business Roundtable, the Texas Association of Business and the Longview Chamber of Commerce. However, it doesn’t extend to the member companies of those groups. “[T]he Court declines to extend injunctive relief to members of Plaintiff-Intervenors,” the judge wrote.

Even though the court indicates that it believes the FTC lacks the rulemaking authority to issue a noncompete ban, the judge declined to issue a nationwide ban for now, Coleman said.

Part of the reason, according to the order, appears to be that the plaintiffs-intervenors did not sufficiently brief the court on why a ban should be applied more widely.

The FTC estimates that 30 million people — one in five US workers — are bound by a noncompete clause in their current jobs. For most of them, the agency asserts that such a clause restricts them from freely switching jobs, lowers wages, stifles innovation, blocks entrepreneurs from starting new businesses and undermines fair competition.

The US Chamber of Commerce, in a statement, characterized the limited preliminary injunction as a win. “The FTC’s blanket ban on noncompetes is an unlawful power grab that defies the agency’s constitutional and statutory authority and sets a dangerous precedent where the government knows better than the markets. The U.S. Chamber will continue to hold the FTC accountable in court,” said the group’s chief counsel Daryl Joseffer.

In response to the order, FTC spokesperson Douglas Farrar said, “The FTC stands by our clear authority, supported by statute and precedent, to issue this rule. We will keep fighting to free hardworking Americans from unlawful noncompetes, which reduce innovation, inhibit economic growth, trap workers, and undermine Americans’ economic liberty.”

In the meantime, the court’s order does not preclude the FTC from taking enforcement actions against noncompete agreements on a case-by-case basis.

This article has been updated with additional details and context.

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