For the time being, “noncompetes” are legal.

On August 20, a federal judge in the Northern District Court of Texas issued a ruling in Ryan LLC v. Federal Trade Commission to block the Federal Trade Commission (FTC) from enforcing its final rule to ban noncompete agreements. The rule was set to take effect on September 4. Therefore, employers are not currently required to comply with the rule.

Noncompetes are contracts that restrict employees from working for a competitor or starting their own business in the same field for a specific period after leaving a company. The FTC argues that these agreements unfairly limit workers’ mobility and suppress wages by preventing employees from seeking better opportunities elsewhere.

The FTC’s Noncompete Rule: Key provisions

The FTC rule, if it were to take effect, would ban noncompetes for most workers, including both employees and independent contractors. However, it allowed exceptions for noncompete agreements tied to the sale of a business, which are often used to protect the value of a company being sold. Additionally, noncompetes were permitted for senior executives – those in decision-making roles who earned at least $151,164 annually – but only for agreements signed before the rule’s effective date.

The rule also prohibited “de facto” noncompetes – agreements that functionally prevent workers from changing jobs, even if they are not explicitly labeled as noncompetes. For instance, clauses that penalize a worker by making them forfeit benefits or compensation if they join a competitor would fall under this rule.

Finally, employers subject to the rule would be required to provide clear and conspicuous notice to workers informing them that their noncompete agreements would no longer be enforceable.

Legal challenges and court decisions

Shortly after the final rule was published, three lawsuits challenging the final rule were filed: Ryan LLC v. Federal Trade Commission; ATS Tree Services LLC v. Federal Trade Commission; and Properties of the Villages Inc. v. Federal Trade Commission. In each case, the plaintiff argued that the FTC did not have statutory authority to promulgate the final rule.

The court decisions in these cases have varied. In Ryan LLC, the court ruled in favor of the plaintiffs, blocking the FTC’s rule nationwide. The judge held that the FTC exceeded its authority and cited the Supreme Court’s Loper Bright decision, which eliminated Chevron deference, making it more difficult for the FTC to rely on courts deferring to its interpretation of its own regulatory power.

Meanwhile, in Properties of the Villages Inc., the court granted a preliminary injunction, halting enforcement of the rule for the individual plaintiff. While the judge found the plaintiff unlikely to succeed on claims that the FTC lacked rulemaking authority or violated the commerce clause, they did find the plaintiff likely to succeed under the major-questions doctrine. The court reasoned that the rule presented a significant question of economic and political importance that required explicit congressional authorization.

Conversely, in ATS Tree Services, the court denied a preliminary injunction, ruling that the plaintiffs were unlikely to succeed on their claim that the FTC overstepped its authority. The court also found that ATS failed to show it would suffer irreparable harm if the rule were enforced.

The FTC is likely to appeal the decision to strike down the noncompete rule in the Ryan LLC lawsuit. If they do appeal the decision, the case would be brought to the U.S. Court of Appeals for the Fifth Circuit, and, if necessary, it could be brought to the U.S. Supreme Court. In the meantime, employers will not be required to comply with the noncompete rule.

Arguments for utilizing noncompetes: ATS Tree Services

In its complaint, ATS Tree Services argues that noncompete agreements are essential for protecting its significant investments in employee training and proprietary information. ATS offers apprenticeships for roles such as arborist, bucket operator and tree climber, covering the costs of arborist certifications, specialized equipment and commercial driver’s licenses. The company invests thousands of dollars in this specialized training, along with individual climbing gear, to ensure its employees are highly skilled.

To safeguard these investments, ATS requires its employees to sign noncompete agreements. These agreements prevent employees from working for a competitor tree care service provider within the same geographic area for one year after leaving ATS. The company argues that without these agreements, it risks losing highly trained employees to competitors who would benefit from ATS’s training and development without bearing the costs themselves.

Additionally, ATS’s noncompetes protect proprietary business information, such as pricing structures and client relationships, to which employees like its estimator have access. ATS believes that these agreements are critical to maintaining its operational model and high service standards, and that the inability to enforce them would irreparably harm the business.

What’s next? Bipartisan interest in noncompetes

Beyond the ongoing legal challenges, Congress also is considering bipartisan legislation that could impact the future of noncompete agreements. Several bills have been introduced that aim to regulate or ban noncompetes at a federal level, offering different approaches to addressing the issue.

The Workforce Mobility Act (S. 220 and H.R. 731), which has bipartisan support, would prohibit the use of noncompete agreements with most workers, similar to the FTC’s final rule. However, it includes exceptions for agreements related to the sale of a business or the dissolution of a partnership, allowing these agreements to continue in specific circumstances.

Another bipartisan bill, the Freedom to Compete Act (S. 379), takes a narrower approach. This legislation would ban noncompetes for workers covered by the wage and overtime provisions of the Fair Labor Standards Act (FLSA), primarily affecting lower-wage employees. Both bills reflect growing bipartisan interest in the issue, as lawmakers from both sides of the aisle examine the balance between protecting workers’ mobility and safeguarding business interests.

In addition to legislative efforts, lawmakers have publicly supported the FTC’s rule in ongoing litigation, with an amicus brief arguing that Congress has consistently affirmed the FTC’s authority to regulate competition. This bipartisan interest highlights the growing focus on balancing worker mobility with business interests and demonstrates that the debate over noncompetes extends beyond party lines, as lawmakers from both sides of the aisle continue to engage with this issue.

While legislation is unlikely to pass in an evenly divided congress, the bipartisan support means the issue may continue to be topic of relevance regardless of the outcome of any appeal.

Conclusion

With the federal court’s decision to set aside the FTC’s noncompete rule, the landscape for noncompete agreements essentially returns to the status quo. Employers can continue to use noncompete clauses in accordance with existing laws and regulations. However, businesses must remain vigilant, as many states have their own laws governing noncompetes, ranging from outright bans to specific limitations.

Basil Thomson is a senior associate at Ulman Public Policy, TCIA’s Washington, D.C.-based advocacy and lobbying partner.