Federal judge temporarily blocks rule banning non-compete agreements

The FTC rule could affect millions of workers outside its jurisdiction when litigation begins, with some studies suggesting that up to one in five employees are bound by non-compete agreements.

Non-compete agreements typically prevent employers from changing their industry for a specified period of time. They are used in a wide range of professions – including technology, hairdressing, medicine and dance teaching – affecting low- to high-paid earners.

In April, the FTC voted 3-2 to ban the agreements, with a majority of commissioners pointing to research showing such agreements suppress wages, stifle entrepreneurship and inflate labor markets. Critics of the rule, including business groups such as the US Chamber of Commerce, argued that the agreements were an important tool for protecting investments in proprietary information and training.

The chamber and other business groups sued to block the rule soon after it was published, arguing that the FTC lacked the authority to issue a regulation with such sweeping effects on the economy.

The chamber later joined a lawsuit brought by Dallas-headquartered global tax consulting firm Ryan LLC, which sued to block the rule in the Northern District of Texas on April 23, the day the FTC issued its ruling. The Business Roundtable, Texas Association of Business and Longview Chamber of Commerce joined the suit after the initial filing.

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

The FTC said it is reviewing the decision and evaluating its next steps.

“The FTC stands by our clear authority, supported by law and precedent, to issue this rule,” FTC spokesman Douglas Farrar said in a statement. “We will continue to fight to free hard-working Americans from illegal competition, which stifles innovation, stifles economic growth, traps workers and undermines Americans’ economic freedom.”

In reaching its decision, Brown found that the plaintiffs were “likely to prevail on the merits” of their case, arguing that the FTC exceeded its statutory authority in issuing the rule. He sided with the plaintiffs in finding that the FTC provision was not reasonable.

“The Commission lacks evidence as to why they chose to impose such a broad ban — which prohibits the entry or operation of nearly all non-competes — rather than targeting specific, harmful non-competes. [rule] Arbitrary and capricious,” Brown wrote.