FTC ban on employee non-compete agreements delayed by judge

A federal judge has delayed implementation of the U.S. Federal Trade Commission’s nearly blanket ban on noncompete agreements, the first step in a bitter legal battle over how much freedom workers should have to move jobs within the industry.

U.S. District Judge Ada Brown in Dallas sided with the U.S. Chamber of Commerce and a Texas-based tax firm that argued the agency lacked the authority to create rules defining unfair methods of competition. The groups warned that the unprecedented rule would invalidate 30 million employment contracts in a move that “amounts to a massive overhaul of the nation’s economy.”

The ban was set to go into effect on September 4, but will now be put on hold until August while a judge considers a lawsuit filed by groups seeking to permanently remove the rule from the law.

Related: Employee Non-Compete Order Ban Faces Difficult Legal Battle

Brown said in her ruling Wednesday that the challenge to the law “is likely to succeed on its merits” and that the public interest supports temporarily blocking the provision.

The FTC approved the new rules in April, arguing that noncompete agreements unfairly block workers from changing jobs and undermine competition in the labor market. The ban is supported by labor organizations AFL-CIO and Service Employees International Union, Democratic senators and attorneys general from California, Illinois and 17 other states.

“The FTC stands by our clear authority, supported by statute and precedent, to issue this rule,” Douglas Farrar, a spokesman for the agency, said in a statement. “We will continue to fight to free hardworking Americans from unlawful noncompetes that stifle innovation, stifle economic growth, trap workers and undermine Americans’ economic freedom.”

Related: Chamber of Commerce Sues to Block FTC’s Non-Compete Ban

The rule would prohibit most noncompete agreements, including those for senior executives. Existing agreements for executives who earn more than $151,164 a year in a “decision-making position” would remain in effect under the FTC’s ban, while those binding lower-level employees would become unenforceable.

Business groups say the FTC’s rules are too broad and limit companies’ ability to protect confidential information. The ban would affect companies and people across the workforce—everyone from doctors to tax experts to hairdressers—and would shift the balance of power between bosses and staff.

“This ruling is a major victory in the Chamber’s fight against government micromanagement of business decisions,” Chamber of Commerce General Counsel Daryl Joseffer said in a statement. “The FTC’s blanket ban on noncompetes is an unlawful power grab that violates the agency’s constitutional and statutory authority and sets a dangerous precedent where the government knows better than the markets.”

About one in five Americans is bound by a noncompete agreement, according to a March 2022 Treasury Department report. In some industries, including technology and health care, that number is even higher. Studies have found that as many as 45% of primary care physicians and 35% to 45% of tech workers are bound by noncompete clauses.

President Joe Biden supports the ban, and his administration has made competition a key part of its economic policy.

Brown’s decision could be appealed to the conservative 5th U.S. Circuit Court of Appeals in New Orleans, which has become a favorite court of conservative opponents of Biden’s policies on federal regulatory power, guns, abortion and social media regulation.

The case is Ryan v. Federal Trade Commission, 3:24-cv-00986, U.S. District Court, Northern District of Texas (Dallas).

Top image: The Federal Trade Commission (FTC) headquarters in Washington, DC, U.S., Friday, Feb. 17, 2023. A number of business groups have joined the U.S. Chamber of Commerce in opposing the FTC’s proposal to ban non-compete agreements, arguing that it would limit their ability to protect confidential information. Photographer: Ting Shen/Bloomberg.

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