Federal judge partially blocks FTC rule banning non-compete agreements

A federal judge in Texas on Wednesday issued a partial injunction against a Federal Trade Commission (FTC) rule banning noncompete agreements that prevent employees from joining or starting competing companies.

U.S. District Judge Ada Brown in Dallas said in her written decision that the FTC lacks “substantive rulemaking authority” to implement general rules banning practices it considers unfair methods of competition and that the plaintiffs “are likely to succeed on the merits” of their lawsuit, The New York Times reported.

The ruling temporarily bars the FTC from enforcing the rules against a coalition of business groups, including the U.S. Chamber of Commerce and tax consulting firm Ryan, in connection with their pending joint lawsuits.

The FTC estimates that about 30 million Americans, or 20% of the workforce, have signed non-compete agreements, Reuters reports.

Despite denying the nationwide injunction application, Judge Brown said a final ruling would be issued by August 30, just days before the legislation was scheduled to go into effect.

FTC spokesman Douglas Farrar defended the agency’s position. “We will continue to fight to free hard-working Americans from unlawful noncompetes that stifle innovation, stifle economic growth, retain workers, and undermine Americans’ economic freedom,” he said in a statement.

Daryl Joseffer, general counsel of the Chamber’s litigation department, praised the ruling as a significant victory over what he described as an abuse of power by the government. He criticized the FTC’s rule as an unlawful expansion of authority beyond the agency’s constitutional and statutory limits.

The rule was approved in May by the Democratic-majority FTC by a 3-2 vote.

Proponents argue that noncompete agreements restrict competition, wages and worker mobility, in violation of U.S. antitrust law.

Several states, including California, Minnesota, Oklahoma and North Dakota, have already banned non-compete clauses, while others have passed laws restricting their use.

The FTC rules would be the first nationwide ban on such agreements.

Opponents, who include many business groups and Republicans, argue that non-compete clauses are necessary to protect trade secrets, confidential information and investments in employee recruitment and training.

The Chamber and Ryan argue that the FTC has overstepped its authority and that Congress has granted the agency only limited regulatory authority.

The FTC maintains that noncompete statutes inherently violate antitrust laws because they restrict competition among employees, which falls within the agency’s mandate to police anticompetitive practices.

But Judge Brown found the FTC’s justification for such a broad ban insufficient, finding that it imposed a “one-size-fits-all approach” without clear justification.

The FTC also faces a separate challenge in federal court in Philadelphia from a Pennsylvania-based tree-trimming company. A hearing on its request to temporarily block the rule is scheduled for July 10.