Federal Judge Partially Blocks U.S. Ban on Non-Compete Practices: NPR

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

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

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

The decision, issued by Judge Ada Brown of the U.S. District Court for the Northern District of Texas, postponed the effective date of the non-compete ban for the plaintiffs.

In her ruling, Brown wrote that the plaintiffs were likely to succeed on the merits of the case and that temporarily blocking the rule was in the public interest.

“Although this is preliminary, the Court intends to rule on the final substance of this proceeding on or before August 30, 2024,” she wrote.

Ryan’s lawsuit was joined by several organizations representing a broad cross-section of American businesses, including the U.S. Chamber of Commerce, the Business Roundtable, and the Texas Business Association.

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

In its complaint, Ryan accused the FTC of exceeding its legal authority in declaring all non-competitive practices unfair and anti-competitive.

Judge Brown agreed, writing, “The FTC lacks substantial authority to rule on unfair competition practices.”

In a statement issued Wednesday evening, the FTC said its authority is backed by law and case law.

“We will continue to fight to free hardworking Americans from illegal anticompetitive practices that stifle innovation, inhibit economic growth, trap workers, and undermine Americans’ economic freedom,” wrote FTC spokesman Douglas Farrar.

In its relief request, Ryan Tax Services alleged that the ban on non-compete practices would cause “serious and irreparable harm” to its business, including putting its confidential information at risk and enabling its competitors to lure valuable employees, whose knowledge and training would be taken overseas.

“The court’s decision represents an important step toward invalidating a rule that burdens not only Ryan, but also Ryan’s customers, and a large number of employers and employees across America,” said the company’s general counsel, John Smith.

Across the country, many businesses, large and small, have joined the opposition to the new rule.

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

“The Essence of Economic Freedom”

The Federal Trade Commission has long argued that non-compete rules hurt workers.

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

According to the Federal Trade Commission, the new rule could lead to wage increases of nearly $300 billion a year and the creation of 8,500 new businesses annually, once workers can freely pursue new opportunities without fear of being sued by employers.

The ban would exempt senior executives with existing non-compete agreements, on the grounds that those agreements are likely to be renegotiated. The FTC estimates that less than 1 percent of workers are qualified to hold senior executive positions.

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

Why does this doctor want to ban non-compete?

At the Bowen Free Clinic in northern rural Michigan, medical director and family physician James Applegate had hoped the ban would go into effect on Sept. 4, as originally planned.

Applegate Clinic provides free primary health care to uninsured or underinsured patients, most of whom are low-wage workers from area hotels, restaurants and ski resorts.

For more complex medical needs, Applegate relies on other doctors in the area to provide specialized care for free. But he says the lack of competition hurts patients by driving doctors away, something doctors across the country have expressed in public comments to the Federal Trade Commission.

The American Medical Association estimates that between 37% and 45% of doctors have signed non-compete agreements, which typically prohibit them from accepting another job within a certain radius, up to 50 miles, for a specified period of time after they leave the job, usually a year or two.

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

“They’re leaving their patients, and they have to leave the community,” Applegate says. “It’s absolutely morally wrong.”

But others support non-competition.

But a thousand miles to the south, Sarah Ruiz worries that the expiration of non-compete laws could jeopardize her yoga business.

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

At first, she never considered forcing her teachers to sign a non-compete agreement. She knew that yoga teachers often had to piece together work to make a living.

But in 2021, one of her teachers opened a new studio three miles away, and took on half of Sweet Tea’s unlimited monthly memberships.

“I got burned badly, and it was very painful,” Ruiz says. “After that, I decided to create a non-compete agreement.”

She still allows her teachers to teach yoga wherever they want, and many teach in other locations, including at a nearby health center and online from their homes.

But the non-compete it imposed prevents them from opening a new studio within a five-mile radius of Sweet Tea Yoga for two years after their business ends.

She says none of her teachers refused to sign it.

“Most of them were supportive, because it was personal to them too,” she says.

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

“It took a full year, if not a year and a half, before we got back to where we were,” Ruiz says.

She says if she is banned from using non-compete declarations by September, she will have to have a conversation with her teachers and hope for the best.