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A federal judge in Texas on Tuesday blocked a U.S. Federal Trade Commission rule from taking effect that would prohibit employers from requiring workers to sign non-compete agreements.
The ban, which was due to take effect nationwide on September 4, has now been blocked.
U.S. District Judge Ada Brown in Dallas said the FTC does not have the authority to prohibit practices it considers unfair methods of competition by adopting blanket rules.
“The Court concludes that the FTC lacks statutory authority to promulgate the non-compete rule, and that the rule is arbitrary and capricious. Thus, the FTC’s promulgation of the rule is an unlawful agency action,” Brown wrote in his order. “(The rule) is hereby RESOLVED and will not be enforced or otherwise take effect on or after September 4, 2024.”
Brown had temporarily blocked the rule in July for a small number of employers while she reviewed an attempt by the U.S. Chamber of Commerce, the nation’s largest business lobby, and tax services firm Ryan to overturn it altogether.
In his decision, Brown said that even if the FTC had the authority to adopt the rule, the agency had failed to justify banning virtually all noncompete agreements.
“The Commission’s lack of evidence as to why it chose to impose such a sweeping ban…rather than target specific, harmful non-compete clauses renders the rule arbitrary and capricious,” Brown wrote.
FTC spokeswoman Victoria Graham said the agency was disappointed with the decision and was “seriously considering a possible appeal.”
“Today’s decision does not preclude the FTC from addressing non-compete clauses through enforcement actions on a case-by-case basis,” Graham said in a statement.
The White House said the administration still supports banning noncompete agreements, which the FTC said were signed by about 20% of workers.
“Special interest groups and big business worked together today to prevent nearly 30 million hardworking Americans from getting better jobs or starting small businesses,” Press Secretary Karine Jean-Pierre said in a statement. “The Biden-Harris Administration will continue to fight for workers to choose where they work, start a business, and get the pay they deserve, and continues to support the Federal Trade Commission’s ban on non-compete agreements.”
The United States Chamber of Commerce welcomed the decision.
“This decision is a significant victory in the Chamber’s fight against government micromanagement of corporate decisions. The FTC’s blanket ban on non-compete agreements was an unlawful extension of power that would have put American workers, businesses, and our economy at a competitive disadvantage,” Chamber President and CEO Suzanne Clark said in a statement.
The Democratic-controlled FTC approved a 3-2 ban on noncompete agreements in May. The commission and supporters of the rule say the agreements unfairly restrict competition, violate U.S. antitrust law and stifle wages and worker mobility.
The commission often adopts rules that target specific industries, such as requiring telemarketers to make certain disclosures or requiring gas stations to display fuel bills, but it is unusual for the agency to enact bans on broader marketing practices.
The business groups argued that Congress never intended to give the FTC such broad powers and that banning non-compete clauses would make it difficult to protect trade secrets and other confidential information.
Last week, a federal judge in Florida ruled that the ban was likely invalid and barred its application to a real estate developer. But a Philadelphia judge ruled the opposite in July, finding that the FTC had reasonably concluded that non-compete clauses are almost never justified.
Although the FTC’s blanket ban has now been overturned and employers nationwide can continue to use noncompete agreements that comply with existing state-specific restrictions, the ban could be resurrected if the FTC appeals, or even seeks an emergency order from the appeals court to let the rule take effect as scheduled while the appeal proceeds, according to attorneys at the law firm Fisher Phillips.
But the chances of success on either front are not great, they said in a message about the decision.
“Any appeal would go to the business-friendly 5th Circuit Court of Appeals (in Texas), where the chances of the rule being resurrected are slim. And the next step would be a possible trip to the Supreme Court, which has taken direct aim at the state regulator in recent years and likely provides a hostile environment for any attempt by the FTC to exercise such power.”
Whether the appeal is won or lost, it will take time to reach a final resolution, said Katie Lonze, associate general counsel at human resources firm Engage PEO. “This litigation could take years.”
CNN’s Tami Luhby contributed reporting.
Correction: An earlier version of this article omitted the “k” in Susan Clark’s last name.
