FTC’s ban on noncompete agreements squashed by federal judge

A federal judge on Aug. 20 barred the Federal Trade Commission’s (FTC’s) ban on employment noncompete agreements from taking effect Sept. 4.

U.S. District Judge Ada Brown of the Northern District of Texas sided with the U.S. Chamber of Commerce and a Texas-based tax firm that sued to block the rule, writing in her decision that the FTC’s rule is “unreasonably overbroad without a reasonable explanation.”

“This decision is a significant win in the chamber’s fight against government micromanagement of business decisions,” U.S. Chamber of Commerce President and CEO Suzanne Clark said in a statement Tuesday. “A sweeping prohibition of noncompete agreements by the FTC was an unlawful extension of power that would have put American workers, businesses, and our economy at a competitive disadvantage.”

The FTC in April voted 3-2 to ban noncompete agreements, which can bar workers from taking positions with competitors for a period of time after they leave a job.

Under the FTC’s new rule, existing noncompetes for the vast majority of workers would no longer have been enforceable when the rule became effective Sept. 4. Existing noncompetes for senior executives — who represent less than 0.75 percent of workers — could have remained in force under the FTC’s final rule, but employers would have been banned from entering into or attempting to enforce any new noncompetes, even if they involve senior executives, according to the agency.

Employers would have been required to provide notice to workers other than senior executives who were bound by an existing noncompete that they would not be enforcing any noncompetes against them, the FTC said.

“Noncompete clauses keep wages low, suppress new ideas, and rob the American economy of dynamism, including from the more than 8,500 new startups that would be created a year once noncompetes are banned,” said FTC Chair Lina Khan at the time. “The FTC’s final rule to ban noncompetes will ensure Americans have the freedom to pursue a new job, start a new business, or bring a new idea to market.”

With the judge’s ruling on Tuesday, however, that ban is now void.

“We remain committed to holding the FTC — and all agencies — accountable to the rule of law, ensuring American workers and businesses can thrive,” said Clark, noting that this decision is the seventh major legal victory the U.S. Chamber has secured in its fight against the administration’s regulatory agenda.

The FTC could appeal the decision to the 5th U.S. Circuit Court of Appeals in New Orleans.

Two other companies have also sued the FTC over the noncompete rule, and those cases are pending in Florida and Pennsylvania. The companies argue that the noncompete ban would make it difficult to protect trade secrets and investments they make in their employees.

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