(Bloomberg) — A federal judge delayed enforcement of the U.S. Federal Trade Commission's near-total ban on non-compete agreements, the first setback in a high-stakes legal battle 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 argued in a lawsuit that the agency lacks the authority to create rules defining unfair competition practices. The groups warned that the unprecedented rule would invalidate 30 million employment contracts, in a move that “constitutes a major overhaul of the national economy”.
The ban was set to come into effect nationwide on September 4. It will now be on hold until August for the groups seeking to permanently remove the rule from the books while the judge considers the merits of their lawsuit.
Brown said inside her decision on 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 non-compete agreements unfairly block workers from changing jobs and undermine job competition. The ban is supported 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, an agency spokesman, said in a statement. “We will continue to fight to free working Americans from illegal non-competes that reduce innovation, stifle economic growth, lock out workers and undermine Americans' economic freedom.”
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The rule would prohibit most non-compete agreements, including those of senior executives. Existing agreements for executives earning more than $151,164 a year in a “policy-making position” would remain in effect under the FTC's ban, while those binding lower-level workers would become unenforceable.
Business groups argue that the FTC's rule is overly broad and limits companies' ability to protect confidential information. The ban will affect businesses and people across the workforce – everyone from doctors to tax professionals to hairdressers – and will change the balance of power between bosses and staff.
“This decision is a major victory in the Chamber's fight against government micromanagement of business decisions,” Chamber of Commerce General Counsel Daryl Joseffer said in a statement. “The FTC's blanket ban on non-competes is an illegal power grab that defies the agency's constitutional and statutory authority and sets a dangerous precedent where government knows better than markets.”
About one in five Americans is bound by a non-compete agreement. found a March 2022 Treasury Department report. In some industries, including technology and healthcare, it's even higher. Studies have found that up to 45% of primary care physicians and 35% to 45% of technology workers are bound by non-compete clauses.
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As noncompetes have fallen out of favor in a number of states, many companies hit by rival talent raids have countered with lawsuits, alleging that former employees received proprietary information when they defected.
President Joe Biden supports the FTC ban, and his administration has made competition issues a key part of its economic policy.
Brown's decision can be appealed to the 5th U.S. Circuit Court of Appeals in New Orleans. The appeals court has become a favorite for conservative opponents of Biden's policies on federal regulatory power, guns, abortion and social media regulation.
The case is Ryan v. Federal Trade Commission, 3:24-cv-00986, U.S. District Court, Northern District of Texas (Dallas).