A long-awaited nationwide government ban on noncompete agreements has been blocked by a federal judge in Texas just days before it was set to be enacted. The decision by Judge Ada Brown of the U.S. District Court for the Northern District of Texas represents a significant disappointment for workers who’ve felt trapped by the controversial restrictive covenants, but there’s still hope, especially for those living in states like New Jersey that have already passed laws restricting the enforceability of these agreements.
The judge’s decision was handed down last week following an appeal followed by Ryan LLC, a tax services firm in Dallas, Texas, and supported by several other businesses and the U.S. Chamber of Commerce. The group had argued that banning the use of non-compete agreements would cause “serious and irreparable injuries” to their businesses, citing concerns including putting their confidential information at risk and eliminating impediments to competitor recruitment of their employees.
Employers who favor the use of non-compete agreements may be breathing a sigh of relief, but their celebrations may be misplaced. Poorly drafted non-compete clauses are still largely unenforceable, especially in states like New Jersey that only allow non-compete agreements if they are “reasonable in scope, duration, and geographic limits.” Employees who believe that they are being unreasonably kept from seeking advancement can seek legal help to void a non-compete agreement, forcing any employer that tries to enforce a restrictive covenant to pass the three-part test that the state has created to determine whether its language is reasonable.
New Jersey employers trying to enforce a non-compete agreement need to prove the following three points:
• That the language of the agreement is meant to protect the employer’s legitimate interests such as maintaining trade secrets, business information, or customer relationships.
• That the terms of the agreement don’t cause undue hardship on the employee.
• That the restrictions imposed by the non-compete agreement must not harm the public interest.
Courts that are asked to determine whether the terms of a non-compete agreement examine several elements of the situation to determine whether its terms are unreasonable. These factors include:
• The nature of the business
• The role of the employee
• The duration and geographic limitations imposed by the contract’s terms
Much of the controversy that has revolved around non-compete agreements — and which drove the FTC to attempt to impose the federal ban in the first place — arose from businesses imposing non-compete restrictions on minimum-wage employees. The examples that were reported in national newspapers and by other media seemed punitive and mean-spirited and kept people from using skills that they’d worked hard to learn and master to advance themselves. The laws in New Jersey and other states reject any language that prevents individuals from pursuing their ability to make a living or pursue their profession or that stifles innovation.
Judge Brown’s decision in response to the business advocates’ appeal rested on her opinion that the government agency had gone beyond its legal authority in issuing a national ban. She wrote in part,
The FTC lacks substantive rulemaking authority with respect to unfair methods of competition. The role of an administrative agency is to do as told by Congress, not to do what the agency thinks it should do.
The FTC’s ban on non-compete agreements was scheduled to take effect as of September 4th, 2024, and many companies across the country had already taken steps to revise the language in their existing restrictive covenants to make them more reasonable. Though the companies that prevailed in having the law struck are praising the judge’s decision as preservation of the “economic freedom of business and their employees to enter into non-compete agreements,” the FTC under the Biden administration is determining whether to appeal the decision, and will continue to address noncompete agreements “through case-by-case enforcement actions.”
If you have concerns about the enforcement of an employment agreement that you were asked to sign, the employment attorneys at Schorr & Associates are here to help. Contact our experienced advocates today to set up a time for us to discuss your situation.