Texas federal judge partially blocks nationwide ban on non-compete agreements

A federal judge in Texas on Wednesday partially blocked a U.S. Federal Trade Commission rule that would have broadly banned agreements for employees not to hire rivals or start competing businesses. U.S. District Judge Ada Brown in Dallas said in a written decision that the FTC, which enforces federal antitrust laws, lacks the authority to adopt broad rules banning practices it considers unfair methods of competition.

About 30 million people, or 20% of U.S. workers, have signed noncompete clauses, according to the FTC. Brown, appointed by Republican former President Donald Trump, has 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 consulting firm Ryan, pending the outcome of their combined lawsuits.

The rule is set to go into effect in September. The FTC, the Chamber and lawyers involved in the case did not immediately respond to requests for comment.

Democrat-controlled FTC approves ban on non-compete 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 restricts wages and worker mobility. California, Minnesota, Oklahoma and North Dakota already ban 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 noncompetes are a key tool for companies to protect trade secrets, confidential information and investments in recruiting and training employees. Ryan and the House

argue in their lawsuits that the FTC does not have the legal authority to adopt rules prohibiting conduct that is considered an unfair method of competition.

They also argue that the rule violates federal law governing agency rulemaking because the commission failed to consider narrower restrictions on noncompetes, among other claims. The FTC argued that noncompetes inherently violate antitrust laws by restricting competition between companies in recruiting employees, and prohibiting them falls within the agency’s broad authority to police anticompetitive conduct.

The commission cited U.S. appeals court rulings that upheld FTC rules requiring fuel distributors to state the “octane rating” of gasoline and shipping companies to ship products within advertised time frames. Brown said Wednesday that rule is likely invalid because the FTC failed to justify a broad, near-total ban.

“It imposes a ‘one size fits all’ approach with no end date, which prevents a rational connection between the facts found and the choice made,” the judge wrote. The FTC also faces a challenge to its rule in federal court in Philadelphia from a Pennsylvania-based tree trimming company. The judge scheduled a July 10 hearing on the company’s motion to temporarily block the rule.

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