A federal judge delayed the effective date of the Federal Trade Commission’s near-total ban on noncompete agreements, the first salvo in the high-stakes legal fight over how much freedom workers should have to switch jobs within an industry.
U.S. District Judge Ada Brown in Dallas sided with the U.S. Chamber of Commerce and a Texas-based tax firm that claimed in a lawsuit the agency lacks authority to devise rules defining unfair methods of competition. The groups warned the unprecedented rule would invalidate 30 million employment contracts in a move that “amounts to a vast overhaul of the national economy.”
The ban was set to take effect nationally Sept. 4. It will now be on hold until August for the groups that seek to permanently strike the rule from the books, while the judge considers the merits of their suit.
Brown said in her ruling Wednesday that the challenge to the measure is “likely to succeed on the merits,” and that the public interest weighed in favor of temporarily blocking the rule.
The FTC approved the new rule in April, arguing that noncompete agreements unfairly block workers from switching jobs and undermine labor competition. The ban is backed by labor organizations AFL-CIO and the Service Employees International Union, Democratic senators and attorneys general from California, Illinois and 17 other states.
“The FTC stands by our clear authority, supported by statute and precedent, to issue this rule,” Douglas Farrar, a spokesperson for the agency, said in a statement. “We will keep fighting to free hardworking Americans from unlawful noncompetes, which reduce innovation, inhibit economic growth, trap workers, and undermine Americans’ economic liberty.”
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The rule would ban most noncompete agreements, including those of senior executives. Existing agreements for executives who earn more than $151,164 a year in a “policy making position” would remain in place under the FTC’s ban, while those binding lower-level workers would become unenforceable.
Business groups argue the FTC’s rule is overly broad and limits the ability of companies to protect confidential information. The ban would impact businesses and people across the workforce — everyone from doctors to tax professionals to hair stylists — and shift the balance of power between bosses and staff.
“This ruling is a big win in the Chamber’s fight against government micromanagement of business decisions,” the Chamber of Commerce’s chief counsel Daryl Joseffer 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.”
About one in five Americans is bound by a noncompete agreement, a March 2022 Treasury Department report found. In some industries, including technology and health care, it’s even higher. Studies found as many as 45% of primary care physicians and 35% to 45% of tech workers are bound by noncompete clauses.
As noncompete agreements have fallen out of favor in a number of states, many companies hit by rivals with talent raids have fought back with lawsuits, alleging that former employees took proprietary information when they defected.
President Joe Biden supports the FTC ban and his administration has made competition issues a key part of his economic policy.
Brown’s decision could be appealed to the conservative 5th Circuit Court of Appeals in New Orleans. The appeals court has become a favorite for conservative opponents of Biden’s policies related to federal regulatory power, guns, abortion and social media regulation.
