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The future of the Federal Trade Commission's ban on non-compete agreements, set to take effect this fall, is unclear after a federal court's preliminary ruling last week.
Nearly 1 in 5 Americans, an estimated 30 million people, are subject to non-compete agreements, the FTC says. The agreements prevent workers from taking new jobs with competitors or starting new businesses in the same industry.
The Biden administration first proposed banning non-compete agreements in January 2023. In response, the FTC received more than 26,000 comments, 25,000 of which were in favor of the rule.
Legal challenges to non-competition prohibition
Judge Ada Brown, a Trump-appointed federal judge in Texas, last week issued a preliminary injunction against the FTC’s ban in a lawsuit brought by Ryan LLC, a Dallas-based tax firm. The firm uses noncompete agreements to prevent competitors from poaching their workers and to prevent workers from poaching clients from the firm. Ryan argued that the FTC had exceeded its statutory authority to ban noncompete agreements.
The court agreed that the FTC lacks the authority to make such a sweeping rule and said the plaintiffs are likely to prevail under the facts of the case..
The order came just days after the Supreme Court ruled to overturn the so-called Chevron Doctrine. That decision gives judges more power to challenge the regulatory authority of federal agencies.
Brown’s order is limited in scope: It only prohibits the FTC from enforcing the ban against the plaintiffs, which include Ryan LLC, the U.S. Chamber of Commerce, the Business Roundtable and other business groups. It does not extend to the member companies of those groups.
The judge said she plans to rule on the case by the end of August, and experts expect business groups will try to convince the judge to issue a nationwide ban.
What a non-compete clause means for employees
Employees need to know whether they are bound by one of these agreements and their scope. Employment lawyers say clients are often unaware of the impact non-compete agreements can have or believe they are unenforceable.
“Look at how much deferred compensation you have tied to it, or how much you have to pay back if you violate the rule,” said Peter Rahbar, an employment attorney.
While various States prohibit or restrict non-compete clauses, If you have one, it can be difficult to find another job.
“Part of the problem is that some employers won't even talk to a potential candidate if there's a non-compete clause in place,” said Rahbar, founder of the Rahbar Group in New York City.
Enforcing non-compete clauses can be 'heavy-handed'
Even with state bans, some companies aggressively enforce non-compete agreements, which are not limited to highly paid employees. The agreements are often drafted in such a way that the employee must pay all legal fees in the event an agreement is challenged. So even if an agreement is on shaky legal ground, it can be difficult to break.
“What we're ultimately saying to workers is that if they get sued, even if they win, they're probably going to have to pay about $100,000 to $150,000 in attorney fees,” Daniel Kalish, an attorney at HKM Employment, told the FTC at a hearing last year in support of the ban.
One executive told CNBC that despite being fired from his multinational employer, he was banned from working in the industry for five years because of the non-compete clause he signed.
“It would have cost me half a million to a million dollars to fight, with no guarantee,” said the executive, who asked not to be named for fear of being sued by his former employer. “The problem is, what are you going to say? No, I'm not going to sign this, you're not going to get promoted.”
Despite efforts to ban non-compete clauses, Rahbar says companies have become more aggressive in using them.
“I've seen employers just try to shove them in and in some cases be very strict about enforcing them,” he said.
If you are asked to sign a non-compete clause
Read every document you are asked to sign and better yet, ask for a copy and have an attorney review it.
According to experts, you may be able to negotiate the terms of a non-compete agreement, such as the length of the agreement, its geographic scope, or how competition is defined.
Also watch out for contractual language called a confidential information or proprietary information agreement, which employers also use to keep employees from divulging sensitive business information or trade secrets. This serves the same purpose as a non-compete agreement.
While not everyone is in a position to negotiate, it probably can't hurt to ask. “If it doesn't work out, they'll take the job anyway, but at least try,” Rahbar said.
