Federal Judge Blocks FTC Noncompete Agreement Ban

By Daniel Wiessner

(Reuters) – A federal judge in Texas on Tuesday barred a U.S. Federal Trade Commission (FTC) rule from taking effect that would ban agreements commonly signed by workers not to join their employers’ rivals or launch competing businesses.

U.S. District Judge Ada Brown in Dallas stated that the FTC, which enforces federal antitrust laws, does not have the authority to ban practices it considers unfair methods of competition via broad rules.

Brown had temporarily blocked the rule in July while she reviewed a case initiated by the U.S. Chamber of Commerce and tax service firm Ryan to invalidate it completely. The rule was set to take effect on September 4.

In her ruling, Judge Brown noted that even if the FTC possessed the authority to adopt the rule, it had failed to adequately justify a ban on nearly all noncompete agreements. She remarked, “The Commission’s lack of evidence as to why they chose to impose such a sweeping prohibition … instead of targeting specific, harmful non-competes, renders the Rule arbitrary and capricious.” Brown is an appointee of former Republican President Donald Trump.

FTC spokesperson Victoria Graham expressed disappointment with the ruling, indicating that the agency is “seriously considering a potential appeal.” She added that the decision does not stop the FTC from addressing noncompetes through individual enforcement actions.

Significant Win

Chamber of Commerce President and CEO Suzanne Clark labeled the ruling a significant victory in the fight against government overreach in business decisions, stating, “This decision is a significant win in the Chamber’s fight against government micromanagement of business decisions.”

The noncompete ban had been approved by the Democratic-controlled FTC in a 3-2 vote in May. Supporters of the rule argue that these agreements unfairly restrain competition, violate U.S. antitrust law, and suppress wages and workforce mobility.

About 30 million individuals, or 20% of U.S. workers, have signed noncompetes, according to the FTC.

While the FTC typically adopts rules targeting specific sectors, such as mandating certain disclosures for telemarketers, enacting expansive bans on common business practices is rare. Business groups contend that Congress never intended to grant the FTC such broad powers, asserting that eliminating noncompetes would jeopardize the protection of trade secrets and sensitive information.

Recently, a federal judge in Florida deemed the ban likely invalid and prohibited its application to a real estate developer. Conversely, a judge in Philadelphia upheld the FTC’s position in July, finding that the agency reasonably concluded that noncompete agreements are rarely justified.