Federal judge throws out U.S. ban on noncompetes

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"Noncompetes block workers from freely switching jobs, depriving them of higher wages and better working conditions, and depriving businesses of a talent pool that they need to build and expand," said FTC Chair Lina Khan when the noncompete ban was introduced. / Getty Images

A federal court in Texas has thrown out the government’s ban on noncompete agreements that was set to take effect September 4.

In her ruling, Judge Ada Brown of the U.S. District Court for the Northern District of Texas wrote that the federal agency had overstepped its power when it approved the ban.

"The FTC lacks substantive rulemaking authority with respect to unfair methods of competition," she wrote. "The role of an administrative agency is to do as told by Congress, not to do what the agency think[s] it should do.”

Ryan LLC, a tax services firm in Dallas, had sued to block the rule just hours after the Federal Trade Commission voted narrowly to ban noncompetes for almost all U.S. workers back in April.

Ryan's lawsuit was joined by several organizations that represent a broad swath of American businesses, including the U.S. Chamber of Commerce, Business Roundtable and the Texas Association of Business.

An estimated 30 million people, or one in five American workers, are bound by noncompetes. The employment agreements typically prevent workers – everyone from minimum wage earners to CEOs – from joining competing businesses or launching ones of their own.

The FTC says it is disappointed but will keep fighting to stop noncompetes.

"We are seriously considering a potential appeal, and today’s decision does not prevent the FTC from addressing noncompetes through case-by-case enforcement actions," wrote FTC spokesperson Victoria Graham in a statement.

In requesting relief, Ryan, the tax services firm, had argued that the ban on noncompetes would inflict "serious and irreparable injuries" on its business, including by putting its confidential information at risk and enabling its competitors to poach valuable employees, whose knowledge and training would go out the door.

"Judge Brown’s ruling preserves the economic freedom of businesses and their employees to enter into non-compete agreements,," said the firm's general counsel John Smith. "They play a vital role in safeguarding intellectual property and innovation, building trust within businesses, and investing in training their people."

'Core to economic liberty'

The FTC has long argued that noncompetes hurt workers.

"The freedom to change jobs is core to economic liberty and to a competitive, thriving economy," said FTC Chair Lina M. Khan in a statement when the proposed rule was first introduced. "Noncompetes block workers from freely switching jobs, depriving them of higher wages and better working conditions, and depriving businesses of a talent pool that they need to build and expand."

According to the FTC, the new rule could lead to wage increases totaling nearly $300 billion per year and the creation of 8,500 new businesses per year, once workers can freely pursue new opportunities without the fear of being taken to court by their employers.

The ban would carve out an exception for senior executives with existing noncompete agreements, on the grounds that these agreements are more likely to have been negotiated. The FTC estimates that less than 1% of workers would qualify as senior executives.

Existing noncompete agreements would not need to be formally rescinded under the rule, but employers would be required to inform their employees that they are no longer enforceable.