Texas judge blocks FTC rule banning noncompete agreements

A federal judge in Texas on Tuesday blocked a Federal Trade Commission rule that would ban employers from forcing workers to sign noncompete agreements.

The rule was slated to go into effect on Sept. 4, but U.S. District Judge Ada Brown held that the FTC lacks the authority to ban the practice of employers precluding employees from doing business with other businesses and companies. Brown ruled that the agency "exceeded its statutory authority" in making the rule, which she called "arbitrary and capricious," according to a 27-page decision.

Groups that oppose the FTC rule, such as the Chamber of Commerce and the tax service firm Ryan, contend that noncompete agreements are necessary to protect business relationships, trade secrets, and investments they make to train employees. It is estimated that there are more than 30 million workers across a variety of fields subject to noncompete agreements.

The Chamber of Commerce called the ruling a victory in its efforts "against government micromanagement of business decisions."

In April, the FTC voted 3-2 to issue the rule, in part because commissioners said the evidence showed that such agreements can lead to suppressed wages and can stifle entrepreneurship, among other problems.

If the rule had gone into effect, it would have barred employers from including such agreements in employment contracts and would have upended existing clauses for most workers subject to them.

FTC spokeswoman Victoria Graham said the decision does not stop the agency from addressing noncompete agreements through "case-by-case" enforcement actions, it only means that the government cannot outright ban them in private business practices.

"We are seriously considering a potential appeal," Graham added.

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The Texas judge had temporarily blocked the rule in July for a small fraction of employers while she considered the lawsuit.

The Dallas case is one of three lawsuits challenging the noncompete rule. Other lawsuits are pending in Pennsylvania and Florida, with one judge initially siding with the FTC and another against it. Neither lawsuit has reached a final determination on the agency's rule.