In a recent decision, a federal district court in Texas has set aside a rule by the Federal Trade Commission (FTC) which made it illegal for employers to use noncompete agreements in an employment context. This means that existing agreements will still be considered valid and enforceable for the time being, although the rule remains on the books while the case is being litigated. However, the FTC has vowed to appeal the court’s ruling, placing its future in jeopardy.
What Are Noncompete Agreements?
Noncompete agreements are a type of contract signed between employers and employees that prevents them from taking a job with a competing business in the same market, or from starting a competing company of their own. Often, they are included as a part of certain employment contracts to prevent employees from using their experience, training or trade secrets to benefit competitors. This, in turn, helps to protect the benefits that companies earn through research and development, and protects them from having their talent poached.
Why Were They Banned?
Noncompete agreements were banned by the FTC to address what it described as the anti-competitive nature of these contracts. While they are beneficial to employers, they also limit employees’ ability to benefit from their own skills and contacts. This can force them to stay in jobs they might otherwise have left due to an inability to find better alternatives, keeping wages low and suppressing economic mobility.
What is This Case About?
This case involves a lawsuit by the US Chamber of Commerce, along with a number of other companies, sued over the FTC rule banning noncompete agreements, claiming that it was illegal. According to the suit, the FTC exceeded its authority under the Administrative Procedures Act (APA), issuing a rule it did not have the legal authority to issue. The judge agreed, setting aside the rule and preventing it from being enforced nationwide.
Why Does This Matter?
About one in every five Americans is bound by some version of a noncompete agreement, limiting their ability to find new work or advance their careers. It is estimated that banning these agreements could earn workers about $400 billion over the next ten years, collectively, at the cost of employers who would need to pay more to find new workers or keep more workers on with them. However, with the ban blocked, employees with these agreements will be stuck in their current positions, at least for now.
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