A federal court partially blocks U.S. ban on noncompetes

A federal court in Texas has partially blocked the government’s ban on noncompete agreements that was set to take effect September 4.

Ryan LLC, a tax services firm in Dallas, had sued to block the rule just hours after the Federal Trade Commission voted narrowly to ban noncompetes for almost all U.S. workers back in April.

An estimated 30 million people, or one in five American workers, are bound by noncompetes . The employment agreements typically prevent workers – everyone from minimum wage earners to CEOs – from joining competing businesses or launching ones of their own.

Judge Ada Brown of the U.S. District Court for the Northern District of Texas delivered the ruling.

In its complaint, Ryan LLC accused the FTC of overstepping its statutory authority in declaring all noncompetes unfair and anticompetitive.

The tax services firm argued that the ban on noncompetes would inflict “serious and irreparable injuries” on its business, including by putting its confidential information at risk and enabling its competitors to poach valuable employees, whose knowledge and training would go out the door.

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

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

'Core to economic liberty'

Meanwhile, the FTC has argued that noncompetes suppress innovation and hurt workers.

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

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 pursue new opportunities without the fear of being taken to court by their employers.

The ban would carve out an exception for senior executives with existing noncompete agreements, on the grounds that these agreements are more likely to have been negotiated. The FTC estimates that less than 1% of workers would qualify as senior executives.

Existing noncompete agreements would not need to be formally rescinded under the rule, but employers would be required to inform their employees that they are no longer enforceable.

The Texas ruling is far from the final word on the noncompete rule, however. The case will continue to make its way through the appeals process, a legal journey that could take months if not years.

Why this doctor wants a noncompete ban

At the Boyne Area Free Clinic in northern, rural Michigan, medical director and family physician James Applegate is hoping the ban will take full effect on Sept. 4, as scheduled.

Applegate’s clinic offers free primary health care to patients who are uninsured and underinsured, mostly low wage workers from the area’s hotels, restaurants and ski resorts.

For more complex medical needs, Applegate relies on other doctors in the area to provide specialty care for free. But he says noncompetes hurt patients by driving doctors away, a concern that physicians all over the country shared through public comments to the FTC.

The American Medical Association estimates that between 37% and 45% of doctors have signed noncompetes, which typically prevent them from taking another job within a certain radius, as much as 50 miles, for a set period of time after they quit, usually one or two years.

What that means for doctors is that if they have a problem with their employer and want a new job, they must leave the area all together.

"They leave their patients. They have to leave the community," says Applegate. "It’s just so morally wrong."

But others support noncompetes

A thousand miles south, however, Sarah Ruiz worries the end of noncompetes would put her yoga business in jeopardy.

Ruiz opened Sweet Tea Yoga in 2018 after moving to Peachtree City and realizing the golf-cart community of 40,000 people had no dedicated yoga studio.

At first, she never considered making her teachers sign noncompetes. She knows, yoga teachers typically have to piece together work to make a living.

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

"I got burned, and it hurt," says Ruiz. "After that, I then created a noncompete."

She still allows her teachers to teach yoga anywhere they wish. Many of them do teach elsewhere, including at a nearby wellness center and online from their homes.

But her noncompete restricts them from opening a new studio within a five mile radius of Sweet Tea Yoga for two years after ending employment.

She says not a single one of her teachers refused to sign it.

"Most of them were supportive, because it was personal for them as well," she says.

Because yoga teachers' pay is based in part on the number of students in each class, her teachers lost income when half the regulars left.

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

If and when the noncompete ban takes effect, she says she’ll have to have a conversation with her teachers and hope for the best.

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