US Judge Partially Blocks FTC Ban on Employee Non-Compete Agreements

By Daniel Wiessner

(Reuters) – A federal judge in Texas on Wednesday partially blocked the implementation of a U.S. Federal Trade Commission rule that would have banned common agreements for employees not to do business with their employers’ rivals or start competing businesses.

U.S. District Court Judge Ada Brown in Dallas said in a written decision that the FTC, which enforces federal antitrust law, lacks the authority to adopt broad 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.

Brown, an appointee of Republican 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 consulting firm Ryan, until their combined lawsuits are resolved.

A judge denied their request to block the rule nationwide, saying it was unclear whether such an order was appropriate. Brown said she would issue a final ruling by Aug. 30, days before the rule goes into effect.

FTC spokesman Douglas Farrar said the agency maintains its “clear authority” to issue such a rule.

“We will continue to fight to free hard-working Americans from unlawful noncompetes that stifle innovation, stifle economic growth, lock out workers, and undermine Americans’ economic freedom,” Farrar said in a statement.

Daryl Joseffer, general counsel of the Chamber’s litigation department, called the ruling “a major victory in the Chamber’s fight against government micromanagement of business decisions.”

“The FTC’s blanket ban on noncompete agreements is an unlawful power grab that violates the agency’s constitutional and statutory authority,” he said.

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. The FTC’s 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 lacked the authority to adopt the ban and that Congress granted the agency only limited regulatory authority.

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

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.

(Reporting by Daniel Wiessner in Albany, New York; editing by Rod Nickel, Alexia Garamfalvi and Bill Berkrot)