Federal court partially blocks US ban on non-compete clauses

A Texas federal court has partially blocked the government’s ban on non-compete agreements, which was set to take effect September 4.

Ryan LLC, a Dallas tax services firm, filed a lawsuit to block the rule just hours after the Federal Trade Commission narrowly voted to ban non-compete clauses for nearly all American workers in April.

The U.S. Chamber of Commerce originally filed its own lawsuit against the FTC in a separate federal court in Texas, but has since joined Ryan’s case.

“The Court grants the motion for a preliminary injunction and postpones the effective date of the rule as applied to the plaintiffs,” wrote Judge Ada Brown of the U.S. District Court for the Northern District of Texas. “While this order is preliminary, the Court intends to rule on the merits of this action no later than August 30, 2024.”

An estimated 30 million people, or one in five American workers, are subject to non-compete clauses. These employment contracts typically prevent workers—from minimum wage earners to CEOs—from joining or starting competing companies.

In its complaint, Ryan LLC accused the FTC of exceeding its statutory authority by declaring all non-compete clauses unfair and anticompetitive.

The tax services firm The company argued that the non-compete ban would cause “serious and irreparable harm” to its business, including by jeopardizing its confidential information and allowing competitors to poach valuable employees, whose knowledge and training would be wasted.

Across the country, many businesses, large and small, have opposed the new rule.

A separate but similar case brought by ATS Tree Services, a small Pennsylvania tree-care provider, has a hearing scheduled for July 10.

“At the heart of economic freedom”

At the same time, the FTC has argued that non-compete clauses stifle innovation and harm workers.

“The freedom to change jobs is essential to economic liberty and a competitive, thriving economy,” FTC Chairwoman Lina M. Khan said in a statement when the proposed rule was first introduced. “Non-compete clauses prevent workers from freely changing jobs, depriving them of higher wages and better working conditions, and depriving businesses of a talent pool they need to build and grow.”

According to the FTC, the new rule could lead to wage increases totaling nearly $300 billion per year and the creation of 8,500 new businesses per year, once workers can freely seek new opportunities without fear of being sued by their employers.

The ban would make an exception for executives who already have noncompete agreements in place, on the grounds that those agreements are more likely to have been negotiated. The FTC estimates that less than 1 percent of workers would be considered executives.

Existing non-compete agreements would not need to be formally voided under this rule, but employers would be required to notify their employees that they are no longer enforceable.

The Texas decision, however, is far from final on the noncompete issue. The case will continue to wind its way through the appeals process, a legal journey that could take months or even years.

Why This Doctor Wants a Non-Compete Ban

At the Boyne Area Free Clinic in rural northern Michigan, medical director and family physician James Applegate hopes the ban will go into full effect on Sept. 4, as planned.

The Applegate Clinic provides free primary health care to uninsured and underinsured patients, primarily low-wage workers at area hotels, restaurants and ski resorts.

For more complex medical needs, Applegate relies on other area doctors to provide specialized care for free. But he says non-compete clauses hurt patients by driving away doctors, a concern that doctors across the country have shared in public comments to the FTC.

The American Medical Association estimates that between 37 and 45 percent of physicians have signed noncompete agreements, which typically prevent them from accepting another job within a certain radius, up to 50 miles, for a set period after they resign, usually one to two years.

For doctors, this means that if they have a problem with their employer and want a new job, they have to leave the area.

“They’re abandoning their patients. They have to leave the community,” Applegate says. “It’s just morally wrong.”

But others support non-compete clauses.

But a thousand miles south, Sarah Ruiz fears that the end of non-compete clauses will jeopardize her yoga business.

Ruiz opened Sweet Tea Yoga in 2018 after moving to Peachtree City and realizing the golf cart community of 40,000 didn’t have a dedicated yoga studio.

At first, she never considered having her teachers sign non-compete clauses. She knows that yoga teachers typically have to take on extra work to make a living.

But in 2021, one of her teachers opened a brand new studio three miles away, taking over half of Sweet Tea’s unlimited monthly membership.

“I got burned and it hurt,” Ruiz said. “After that, I signed a non-compete agreement.”

She still allows her teachers to teach yoga wherever they want. Many of them teach elsewhere, including at a nearby wellness center and online from home.

But their non-compete agreement prevents them from opening a new studio within five miles of Sweet Tea Yoga for two years after their employment ends.

She says none of her teachers refused to sign it.

“Most of them supported me because it was also a personal matter for them,” she says.

Since yoga teachers’ salaries are based partly on the number of students in each class, her teachers lost income when half of their regular students left.

“It took us a whole year, maybe a year and a half, to get back to where we were,” Ruiz says.

If and when the non-compete ban goes into effect, she says she’ll have to have a conversation with her teachers and hope for the best.