Judge upholds Biden-Harris administration’s ban on noncompete clauses

Noncompete clauses effectively prevent workers from starting their own business or finding a new job in the same field within a certain area or timeframe after leaving their current job. The Biden-Harris administration’s ban on them is now tentatively set to go into effect on Sept. 4, pending other legal action.

A federal judge on Tuesday rejected a tree-trimming company’s bid to block the Federal Trade Commission’s (FTC) ban on noncompete agreements from taking effect. 

In April, the FTC voted to ban noncompete agreements—those pesky clauses that employers often force their workers to sign which effectively bar them from starting their own business or finding a new job in the same field within a certain area or timeframe after leaving their current job.

An estimated 30 million American workers are currently affected by noncompete clauses—that’s roughly 18% of the US workforce. These clauses have been shown to lower workers’ pay and restrict their opportunity and mobility. 

ATS Tree Services LLC had asked the court for both a stay on the rule’s Sept. 4 effective date and a preliminary injunction. Ultimately, US District Judge Kelley Hodge in Philadelphia—a Biden appointee—denied the bid pending the outcome of the company’s lawsuit.

Hodge wrote in her decision that the FTC has the power to “prevent unfair methods of competition in commerce” under the 1914 Federal Trade Commission Act; this includes agreements that prevent employees from leaving to work for a competitor or start a competing business.

In a statement, FTC spokesperson Douglas Farrar said that Hodge’s decision “fully vindicates that precedent and the plain text of the FTC Act clearly provide us rulemaking authority to ban noncompete clauses, which harm competition by inhibiting workers’ freedom and mobility while stunting economic growth.”

In response to Hodge’s ruling, Adam Burnett, media manager with the Pacific Legal Foundation, issued a statement on behalf of ATC Tree Services. 

“We are disappointed by the court’s decision to deny our client…a preliminary injunction,” Burnett said. “ATS, a small tree care business, relies on its non-compete agreements to enable it to provide valuable training to its employees. Banning these agreements will significantly harm ATS’ business.” 

In a separate case brought earlier this year by Ryan LLC, a company owned by Republican mega donor and tax adviser to former president Donald Trump, a Trump-appointed judge issued a preliminary order against the rule. Business groups including the US Chamber of Commerce and the Business Roundtable had a hand in bringing this case to court as well.

The US District Court for the Northern District of Texas said it would “rule on the ultimate merits of this action on or before Aug. 30, 2024,” just five days before the rule is set to take effect. 

The FTC rule agreed upon earlier this year would ban new noncompete agreements for the vast majority of American workers and require employers to let current and past employees know they won’t enforce them going forward. Companies would also be required to throw out existing noncompete agreements for most of their employees.

Existing noncompetes for senior executives, who represent less than 0.75% of workers, can remain intact under the new rule. Employers would be banned, however, from entering into any new noncompete agreements with senior executives.

The FTC estimates that the rule, if put into place, would boost workers’ wages by up to $488 billion over the next decade, with earnings for the average American worker increasing by an additional $524 per year. The agency also expects that banning noncompetes would lower spending on physician services by between $74 billion and $194 billion over the next decade.

The final rule is also expected to help drive American innovation; the FTC estimates there would be 17,000 to 29,000 more patents filed each year over the next decade. Additionally, new business formation is expected to grow by 2.7% each year.

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