Days before a government ban on noncompete agreements was set to take place, Federal Judge Ada Brown of the U.S. District Court for the Northern District of Texas put a stop to it, ruling it an overreach on the part of the Federal Trade Commission.  Significantly, Judge Brown made it clear her ruling has a “nationwide effect,” and thus this ruling is applicable “in all judicial districts equally.”

Judge Brown threw out the ban following an appeal filed by a tax services firm in Dallas, Texas. Ryan LLC was joined by several other businesses and the U.S. Chamber of Commerce in attempting to block the ban, arguing that it would cause “serious and irreparable injuries” to their businesses. Their appeal of the FTC’s ruling cited several concerns, including putting confidential information at risk and facilitating recruitment of employees by competitors.

Noncompete agreements are restrictive covenants included in employment agreements. They offer multiple benefits for business owners, including maintaining confidentiality, protecting intellectual property, and stopping competitors from poaching valuable staff members. As an increasing number of businesses have begun using the clauses over the last several years, employee advocates have argued that they’re being abused, pointing to some companies that have used them to prevent minimum wage workers from seeking better opportunities and arguing that they stifle innovation.

In her ruling, Judge Brown wrote that the government’s ban went beyond its legal authority.

The FTC lacks substantive rulemaking authority with respect to unfair methods of competition. The role of an administrative agency is to do as told by Congress, not to do what the agency thinks it should do.

The sudden shift in direction will have a broad impact: It is estimated that 20 percent of Americans are bound by noncompete clauses in employment agreements. Had the FTC’s ban gone into effect as of September 4^th, companies would have been required to notify employees working under those restrictive covenants that they were no longer enforceable, and it would have been illegal for companies to execute new non-compete agreements other than for executive-level employees. Organizations around the country had already begun reviewing and changing their internal policies in response to the federal ban, and while the appellants in the case are praising what they call the preservation of “economic freedom of business and their employees to enter into non-compete agreements,” the government is considering its options for appeal and promising to address noncompetes “through case-by-case enforcement actions.”

If you have questions about how this ruling will impact your organization, we can help. Contact our experienced business attorneys today to set up a time for us to meet.