Noncompete agreements have been a source of controversy for years. Employers ranging from corporate hospitals to fast food restaurants sometimes expect employees to sign contracts that prohibit them from starting their own company or going to work for a competitor within the same industry.
Businesses view noncompete agreements as a key way to protect against unfair competition and to maintain their trade secrets. Regulatory authorities and workers worry that noncompete agreements might stifle innovation.
The Federal Trade Commission (FTC) recently announced a rule banning noncompete agreements in April set to take effect in early September. However, a ruling from a federal judge in Texas has put the enforcement of that new rule on hold.
What has happened with the noncompete ban so far?
The FTC announced its intention to ban noncompete agreements in 2023. The FTC provided an opportunity for public feedback. Then, in April of 2024, it announced the new final rule. Lawsuits began cropping up in courts across the country shortly thereafter. A lawsuit filed in Texas led to an initial injunction preventing the enforcement of the noncompete agreement ban against the plaintiffs in that case. The judge recently issued the final ruling on the matter.
The ruling includes language clearly stating that the FTC exceeded its authority by implementing a nationwide noncompete ban. This ruling effectively prevents the courts from upholding the final rule as it currently stands. However, the potential is there for this matter to go up further through the judicial system.
There are other pending lawsuits in other states that have seen judges reach the opposite conclusion regarding the validity of the FTC noncompete ban. Currently, businesses still have the option of enforcing noncompete agreements if employees start their own businesses or seek employment with a company’s direct competitors.
That may eventually change if higher courts determine that the federal judge who recently ruled erred in their decision. Some companies have already begun to pivot away from non-compete agreements by using other restrictive covenants in their employment contracts. Others may push to prevent the FTC rule from taking effect.
