Federal judge partially blocks US ban on non-compete agreements: NPR

The U.S. Federal Trade Commission building is seen on September 19, 2006 in Washington, DC

The U.S. Federal Trade Commission building is seen on September 19, 2006 in Washington, DC

Paul J. Richards/AFP via Getty Images

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Paul J. Richards/AFP via Getty Images

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

Ryan LLC, a Dallas tax firm, filed a lawsuit to block the rule just hours after the Federal Trade Commission narrowly voted in April to ban noncompete agreements for nearly all U.S. workers.

The decision by Judge Ada Brown of the U.S. District Court for the Northern District of Texas delays the effective date of the plaintiffs’ non-compete order.

Brown wrote in her ruling that the plaintiffs are likely to prevail on the merits of the case and that temporarily blocking the rule is in the public interest.

“While this is a preliminary ruling, the court is expected to rule on the final merits of this case no later than August 30, 2024,” she wrote.

Several organizations representing a large portion of American businesses joined Ryan’s lawsuit, including the U.S. Chamber of Commerce, Business Roundtable and the Texas Association of Business.

An estimated 30 million people, or one in five American workers, are bound by non-compete agreements. The employment agreements typically prevent workers — from minimum-wage earners to CEOs — from joining rival companies or starting their own businesses.

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

Judge Brown agreed, writing, “The FTC has no substantial regulatory authority with respect to unfair competitive practices.”

The FTC said in a statement Wednesday evening that its authority is supported by both law and precedent.

“We will continue to fight to free hardworking Americans from abusive non-compete agreements that stifle innovation, hinder economic growth, ensnare workers, and undermine Americans’ economic freedom,” wrote FTC spokesman Douglas Farrar.

In seeking relief, Ryan, the tax firm, argued that the ban on non-compete clauses would cause “serious and irreparable harm” to its business, including putting its confidential information at risk and allowing its competitors to poach valuable employees, whose knowledge and training would be lost.

“The court’s ruling is an important step toward invalidating a rule that burdens not only Ryan, but Ryan’s clients and countless employers and employees across America,” said John Smith, the firm’s general counsel.

Across the country, many businesses large and small are opposing the new rule.

A separate but similar case, brought by ATS Tree Services, a small Pennsylvania arborist, is scheduled for trial on July 10.

‘Core of economic freedom’

The FTC has long argued that non-compete agreements harm employees.

“The freedom to change jobs is essential to economic freedom and a competitive, thriving economy,” FTC Chair Lina M. Khan said in a statement when the proposed rule was first introduced. “Noncompetes prevent workers from moving freely between jobs, depriving them of higher wages and better working conditions, and depriving businesses of the talent pool they need to build and expand.”

According to the FTC, the new regulations could lead to nearly $300 billion in annual wage increases and the creation of 8,500 new businesses each year. Workers would be free to pursue new opportunities without fear of being sued by their employers.

The ban would carve out an exception for senior executives with existing non-compete agreements, on the grounds that these agreements are more likely to be negotiated. The FTC estimates that less than 1% of employees would qualify as senior executives.

Existing non-competition clauses do not need to be formally withdrawn under the rule, but employers must inform their employees that the clauses are no longer enforceable.

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 effect on Sept. 4 as originally planned.

The Applegate clinic provides free primary care to uninsured or underinsured patients, primarily low-wage workers in area hotels, restaurants and ski resorts.

For more complex medical needs, Applegate relies on other doctors in the area to provide free specialty care. But he says noncompete agreements hurt patients by driving doctors away, a concern shared by doctors across the country in public comments to the FTC.

The American Medical Association estimates that 37% to 45% of physicians have signed a non-compete agreement, which means that after they are fired, they are not allowed to accept another job within a 50-mile radius for a certain period of time (usually one to two years).

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

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

But others are in favor of non-compete clauses

A thousand miles south, however, Sarah Ruiz worries that the end of the non-compete clause 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 its own yoga studio.

She never considered making her teachers sign non-compete agreements in the first place, knowing that yoga teachers typically have to rack up work to make ends meet.

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

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

She still lets her teachers teach yoga wherever they want, many of them teaching elsewhere, including at a nearby spa and online from home.

However, her non-compete clause prohibits 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 something personal for them too,” she says.

Because yoga teachers’ salaries are based in part on the number of students per class, her teachers lost income when half of her regular students left.

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

If she is no longer allowed to use the non-competition clause from September onwards, she will have to talk to her teachers and hope for the best.

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