A federal judge in Texas this week blocked a new rule from the Federal Trade Commission that would have made it easier for employees to quit a job and work for a competitor.
The agency’s ban on noncompete agreements comes as a growing number of states, including New York, are working to ban or limit the practice.
Jody Galvin, partner in the business litigation group at Hodgson Russ, told Spectrum News 1 that the FTC’s ban was on shaky legal ground from the start.
“The court decided that the Federal Trade Commission did not have the authority, essentially adopting a nationwide law, which is really a power reserved to Congress,” she said.
FTC now won't be able to enforce the rule, which was set to go into effect on Sept. 4.
According to the FTC, a noncompete clause is a contractual term between an employer and a worker that blocks the worker from working for a competing employer, or starting a competing business, typically within a certain geographic area and period of time after the worker’s employment ends.
While opponents argue the agreements are needed, in part, to protect trade secrets and business relationships, Galvin says the ban was intended to alleviate the burden such agreements create for employees, especially lower-level ones.
“For most employees who have noncompete agreements, it really impacts their ability to move and take new employment. The other main argument was that it basically depressed innovation,” Galvin said.
New York state has had its own battles over noncompete agreements. Lawmakers indicate they aren’t finished.
Last year, Gov. Kathy Hochul vetoed a bill that would have banned noncompete agreements statewide, criticizing it as a “one-size-fits-all approach”. In her veto, Hochul signaled an openness to striking a middle ground.
Absent a veto override, Assemblymember Phil Steck indicated the next step could be such a compromise.
“What they prefer to do is have negotiations with the governor and come to an agreement on a bill that the legislature and the governor can accept,” he said.
He said that could come in the form of a salary limit, but such a limit would have to be effective both upstate and in New York City, where salaries vary drastically. Others insist that the ban should only apply to certain industries, or certain types of employees.
The governor’s office Thursday did not indicate what such a compromise would look like on her end, telling Spectrum News 1 in a statement that she will review all legislation that passes both houses of the legislature.
Across the aisle, Assembly Minority Leader Will Barclay questioned the motivation of a state ban when New York already has restrictions in place.
“I don’t know why government feels the need to intrude on private contracts between individuals, an employer and an employee,” he said. “Very often, non-competes make a lot of sense.”
Galvin says New York wouldn’t be the first to issue a total ban, and there is momentum behind bans and restrictions from state to state.
“There is a trend that is happening, and I would say most of that activity on a state-by-state basis has happened over the last couple of years,” she said.