Federal judge blocks ban on non-compete agreements

(Reuters) – A federal judge in Texas on Wednesday partially blocked a U.S. Federal Trade Commission rule that would ban non-compete agreements from taking effect.

District Judge Ada Brown of Dallas said in a written decision that the FTC, which enforces federal antitrust law, does not have the authority to adopt general rules banning practices it considers unfair methods of competition.

According to the FTC, about 30 million people, or 20% of U.S. workers, have signed non-compete agreements.

Judge Brown, appointed by former President Donald Trump, blocked the FTC from enforcing the rule against a coalition of business groups, including the U.S. Chamber of Commerce, the nation’s largest business lobby, and tax services firm Ryan, until their combined lawsuits are resolved.

The regulations are due to come into force in September.

The FTC, the Chamber and attorneys involved in the case did not immediately respond to requests for comment.

The Democratic-controlled FTC approved the ban on noncompete agreements in a 3-2 vote in May. The commission and supporters of the rule say the agreements are an unfair restriction of competition that violates U.S. antitrust law and limits wages and worker mobility.

California, Minnesota, Oklahoma and North Dakota have already banned noncompete agreements, and at least a dozen other states have passed laws restricting their use. But the FTC rule would be the first nationwide ban on noncompete agreements.

Business groups and many Republicans say noncompete clauses are a key tool that companies can use to protect trade secrets, confidential information and investments in recruiting and training workers.

Ryan and the Chamber argue in their lawsuits that the FTC lacks the legal authority to adopt rules prohibiting conduct it deems an unfair method of competition.

They also argue the rule violates federal law governing agency rulemaking because the commission failed to consider narrower restrictions on noncompetes and other allegations.

The FTC argued that noncompete clauses inherently violate antitrust law because they restrict competition between companies for employees, and that prohibiting such clauses falls within the agency’s broad authority to police anticompetitive conduct.

Judge Brown said Wednesday that the rule is likely invalid because the FTC failed to justify such a broad, near-total ban.

“It imposes a one-size-fits-all approach without a specific end date, which does not allow for the establishment of a rational connection between the facts established and the choice made,” the judge wrote.

The FTC is also facing a challenge to its rule in federal court in Philadelphia from a Pennsylvania tree trimming company. A judge has scheduled a July 10 hearing on the company’s request to temporarily block the rule.