In a significant legal development, a federal judge in Texas has temporarily halted a new Federal Trade Commission (FTC) rule that would ban noncompete agreements. The ruling came on Wednesday after business groups vigorously opposed the regulation.
Judge Ada Brown issued a 33-page opinion stating that the FTC lacked the authority to enforce the rule, which would make it illegal for employers to include noncompete agreements in workers’ contracts. Her order delays the rule’s effective date from September 4 to date pending a final decision on the case’s merits, expected by August 30. The plaintiffs in the case include a Dallas-based tax consultancy and the U.S. Chamber of Commerce.
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The FTC rule, if implemented, could impact millions of workers beyond the lawsuit’s scope. Studies suggest that up to one in five employees are bound by noncompete agreements, which prevent workers from joining competitors within their industry for a set period.
Noncompete agreements are prevalent across various sectors, from technology and medicine to hairstyling and dance instruction, affecting both low- and high-wage earners. In April, the FTC voted 3-2 to ban these agreements, citing research indicating they suppress wages, hinder entrepreneurship, and disrupt labor markets.
However, business groups, including the U.S. Chamber of Commerce, contend that noncompete agreements are vital for protecting proprietary information and investments in employee training. These groups sued to block the rule immediately after its issuance, arguing that the FTC overstepped its authority with such a broad regulation.
The U.S. Chamber of Commerce joined the case initiated by Ryan LLC, a global tax-consulting firm based in Dallas, on April 23, the day the FTC issued its rule. The Business Roundtable, Texas Association of Business, and Longview Chamber of Commerce also joined the lawsuit.
“This ruling is a big win in the Chamber’s fight against government micromanagement of business decisions,” said Daryl Joseffer, chief counsel at the Chamber, in a statement. “The FTC’s blanket ban on noncompetes is an unlawful power grab that defies the agency’s constitutional and statutory authority and sets a dangerous precedent where the government knows better than the markets.”
The FTC responded by saying it is reviewing the decision and considering its next steps. “The FTC stands by our clear authority, supported by statute and precedent, to issue this rule,” said FTC spokesman Douglas Farrar. “We will keep fighting to free hard-working Americans from unlawful noncompetes, which reduce innovation, inhibit economic growth, trap workers, and undermine Americans’ economic liberty.”
Judge Brown found that the plaintiffs were likely to succeed on the merits of their case, arguing that the FTC exceeded its statutory authority. She also deemed the FTC’s issuance of the rule as unreasonable. “The Commission’s lack of evidence as to why they chose to impose such a sweeping prohibition — that prohibits entering or enforcing virtually all noncompetes — instead of targeting specific, harmful noncompetes, renders the [rule] arbitrary and capricious,” Brown wrote.
