A federal judge in Texas temporarily blocked on Wednesday a Federal Trade Commission rule banning noncompete agreements, a new regulation business groups have strenuously opposed.
In a 33-page opinion, Judge Ada Brown found that the agency lacked the authority to issue the rule, which makes it illegal for employers to include noncompete agreements in workers’ contracts. Brown’s order, which is limited to the plaintiffs, postpones the effective date of the rule, Sept. 4, until the court reaches a decision on the case’s merits, which she said would take place by Aug. 30. The plaintiffs include a Dallas-based tax consultancy and the U.S. Chamber of Commerce.
The FTC rule could affect up to millions of workers outside the scope of the lawsuit once it kicks in, as some studies suggest up to one in five employees are bound by noncompete agreements.
Noncompete agreements typically restrict workers from switching employers within their industry for specified periods of time. They’re used in a wide range of industries — including technology, hairstyling, medicine and even dance instruction — affecting low- to high-wage earners.
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In April, the FTC voted 3-2 to ban the agreements, with commissioners in the majority pointing to research that shows such covenants suppress wages, stifle entrepreneurship and gum up labor markets. Critics of the rule, including business groups such as the U.S. Chamber of Commerce, argued that the agreements are an important tool to protect proprietary information and investments in training.
The Chamber and other business groups sued to block the rule immediately after it was issued, arguing the FTC lacked the authority to issue a regulation with such sweeping implications for the economy.
The Chamber subsequently joined the case brought by Ryan LLC, a global tax-consulting firm headquartered in Dallas, that sued to block the rule in 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 big win in the Chamber’s fight against government micromanagement of business decisions,” Daryl Joseffer, chief counsel at the Chamber, said 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 said it’s reviewing the decision and evaluating its 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 keep fighting to free hard-working Americans from unlawful noncompetes, which reduce innovation, inhibit economic growth, trap workers, and undermine Americans’ economic liberty.”
In reaching her decision, Brown found that the plaintiffs “are likely to succeed on the merits” of their case, which argues the FTC exceeded its statutory authority in issuing the rule. She also sided with the plaintiffs in finding that the FTC’s issuing of the rule was not reasonable.
“The Commission’s lack of evidence as to why they chose to impose such a sweeping prohibition — that prohibits entering or enforcing virtually all non-competes — instead of targeting specific, harmful non-competes, renders the [rule] arbitrary and capricious,” Brown wrote.
