Federal judge temporarily blocks rule banning non-compete clauses

A federal judge in Texas on Wednesday temporarily blocked a Federal Trade Commission rule banning non-compete agreements that has been fiercely opposed by business groups.

In a 33-page ruling, Judge Ada Brown ruled that the agency lacked the authority to issue the rule, which makes it illegal for employers to include noncompete clauses in workers’ contracts. Brown’s order, which is limited to the plaintiffs, delays the rule’s effective date of Sept. 4 until the court decides the merits of the case, which she said would happen Aug. 30. The plaintiffs include a Dallas tax firm and the U.S. Chamber of Commerce.

The FTC rule could impact millions of workers who would be outside the reach of the lawsuit once it goes into effect, with some studies showing that one in five employees is bound by a non-compete agreement.

Non-compete agreements typically restrict employees from switching employers within their industry for specified periods of time. They are used in a wide range of industries, including technology, hairstyling, medicine, and even dance classes, and affect both low- and high-wage workers.


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In April, the FTC voted 3-2 to ban the agreements, with commissioners in the majority pointing to research showing that such deals suppress wages, stifle entrepreneurship and stifle labor markets. Critics of the rule, including business groups such as the U.S. Chamber of Commerce, have argued that the agreements are an important tool to protect proprietary information and investments in training.

The House and other business groups filed a lawsuit immediately after it was issued to block the rule, arguing that the FTC lacked the authority to issue a rule with such far-reaching economic implications.

The Chamber subsequently joined the case brought by Ryan LLC, a global tax consulting firm headquartered in Dallas, which filed a lawsuit seeking to block the rule in the Northern District of Texas on April 23, the day the FTC issued its rule. The Business Roundtable, the Texas Association of Business and the Longview Chamber of Commerce also joined the case after it was initially filed.

“This ruling is a major victory in the House’s fight against government micromanagement of business decisions,” Daryl Joseffer, the House’s chief legal counsel, said in a statement. “The FTC’s blanket ban on noncompete agreements is an unlawful power grab that defies the agency’s constitutional and statutory authority and sets a dangerous precedent that the government knows better than the markets.”

The FTC says it is reviewing the decision and considering next steps.

“The FTC stands by our clear authority, supported by statute and precedent, to issue this rule,” Douglas Farrar, an FTC spokesman, said in a statement. “We will continue to fight to free hardworking Americans from abusive non-compete agreements that stifle innovation, hinder economic growth, ensnare workers, and undermine Americans’ economic freedom.”

In reaching her decision, Brown found that the plaintiffs are “likely to succeed on the merits” of their case, stating that the FTC exceeded its statutory authority in issuing the rule. She also sided with the plaintiffs in finding that the FTC’s issuance of the rule was not reasonable.

“The Commission’s lack of evidence as to why it chose to impose such a blanket ban – prohibiting the entry or enforcement of virtually all non-compete clauses – rather than targeting specific, harmful non-compete clauses, makes the [rule] “arbitrary and capricious,” Brown wrote.

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