Federal Judge Blocks FTC Ban on Noncompete Agreements

August 20, 2024—Cleanfax Staff

A non-compete clause (often NCC), or covenant not to compete (CNC), is a term used in contract law under which one party (usually an employee) agrees not to enter into or start a similar profession or trade in competition against another party (usually the employer). Some courts refer to these as "restrictive covenants." As a contract provision, a CNC is bound by traditional contract requirements including the consideration doctrine. The use of such clauses is premised on the possibility that upon their termination or resignation, an employee might begin working for a competitor or starting a business, and gain competitive advantage by exploiting confidential information about their former employer's operations or trade secrets, or sensitive information such as customer/client lists, business practices, upcoming products, and marketing plans.

On Tuesday, a federal judge in Texas barred a U.S. Federal Trade Commission (FTC) rule banning noncompete agreements from being enacted. Reuters reported the judge said the FTC, which is an antitrust law watchdog, does not have the authority to ban practices it deems unfair methods on competition. This same judge had temporarily blocked the rule in July.

In response, the FTC said it is considering an appeal. The ban was set to go into effect Sept. 4.

While the FTC’s rule would have been the first nationwide ban, California, Minnesota, Oklahoma, and North Dakota have already banned noncompete agreements. At least a dozen other states have also passed laws limiting their use. The FTC said an estimated 30 million workers—nearly one in five Americans—are subject to a noncompete clause.

Last week, a U.S. district judge in Ocala, Florida, also blocked the FTC from applying the rule to real estate developer Properties of the Villages, pending the outcome of the company’s lawsuit claiming the commission lacked the power to institute a ban, Reuters reported. At least three lawsuits have been filed challenging the ban.