A federal judge in Texas on Wednesday partially blocked a U.S. Federal Trade Commission rule from taking effect that would ban agreements commonly signed by workers not to join their employers' rivals or launch competing businesses.
U.S. District Judge Ada Brown in Dallas said in a written decision the FTC, which enforces federal antitrust laws, lacked the power to adopt broad rules prohibiting practices that it deems unfair methods of competition.
About 30 million people, or 20% of U.S. workers, have signed noncompetes, according to the FTC.
Brown, an appointee of Republican former President Donald Trump, blocked the FTC from enforcing the rule against a coalition of business groups including the U.S. Chamber of Commerce, the country's largest business lobby, and tax service firm Ryan, pending the outcome of their consolidated lawsuits.
The judge denied their request to block the rule nationwide, saying it was not clear whether such an order was appropriate. Brown said she would issue a final ruling by Aug. 30, a few days before the rule is set to take effect.
FTC spokesman Douglas Farrar said the agency stands by its "clear authority" to issue the rule.
"We will keep fighting to free hardworking Americans from unlawful noncompetes, which reduce innovation, inhibit economic growth, trap workers, and undermine Americans’ economic liberty," Farrar said in a statement.
Daryl Joseffer, chief counsel of the Chamber's litigation arm, called the ruling "a big win in the Chamber’s fight against government micromanagement of business decisions."
"The FTC’s blanket ban on noncompetes is an unlawful power grab that defies the agency’s constitutional and statutory authority," he said.
The Democratic-controlled FTC approved the ban on noncompete agreements in a 3-2 vote in May. The commission and supporters of the rule say the agreements are an unfair restraint on competition that violate U.S. antitrust law and suppress workers' wages and mobility.
California, Minnesota, Oklahoma and North Dakota have already banned noncompete agreements, and at least a dozen other states have passed laws limiting their use. The FTC's rule would be the first nationwide prohibition of noncompetes.
Business groups and many Republicans say that noncompetes are a crucial tool for businesses to protect trade secrets, confidential information and their investments in recruiting and training workers.
Ryan and the Chamber claim in their lawsuits that the FTC did not have the authority to adopt the ban and that Congress granted the agency only limited rulemaking powers.
The FTC has argued that noncompetes inherently violate antitrust laws by curbing competition between businesses to recruit workers, and banning them falls within the agency's broad powers to police anti-competitive conduct.
Brown on Wednesday said the rule was likely invalid because the FTC had not justified the sweeping, near-total ban.
"It imposes a one-size-fits-all approach with no end date, which fails to establish a rational connection between the facts found and the choice made," the judge wrote.
The FTC is also facing a challenge to its rule in Philadelphia federal court by a Pennsylvania-based tree trimming company. A judge has scheduled a July 10 hearing on the company's motion to temporarily block the rule.
