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A federal judge ruled the US Federal Trade Commission can’t enforce its near-total ban on noncompete agreements that was set to go into effect next month, blocking an effort by the agency to make labor markets more competitive.

In a ruling Tuesday, US District Judge Ada Brown in Dallas sided with the US Chamber of Commerce and a Texas-based tax firm that sued to block the measure. The judge said the FTC lacked the authority to enact the ban, which she said was “unreasonably overbroad without a reasonable explanation.”

The represents a significant blow for the FTC and further divides the judiciary over the regulator’s powers. A federal judge in Pennsylvania had previously sided with the FTC. The rule is likely to be headed for appellate review. Brown had previously of the ban, which was scheduled to take effect on Sept. 4.

“We are disappointed by Judge Brown’s decision and will keep fighting to stop noncompetes that restrict the economic liberty of hardworking Americans, hamper economic growth, limit innovation, and depress wages,” FTC spokesperson Victoria Graham said in a statement. “We are seriously considering a potential appeal.”

The US Chamber of Commerce called the ruling a significant win in its “fight against government micromanagement of business decisions.”

The FTC’s rule was “an unlawful extension of power that would have put American workers, businesses and our economy at a competitive disadvantage,” the chamber said in a statement.

Noncompete agreements have become increasingly common in the US, with an estimated 20% of workers — roughly 30 million Americans — subject to them. The agency had argued the provisions harm workers, while employers claimed they help protect their investments in employees. Only a handful of states bar noncompetes.

A ban on such agreements 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.

The FTC maintains that it had the authority to approve the rule in April, as part of its duty to ward off unfair methods of competition. Graham said the agency will still seek to protect workers limited by noncompete agreements.

“Today’s decision does not prevent the FTC from addressing noncompetes through case-by-case enforcement actions,” Graham said.

Brown’s decision could be appealed to the conservative US 5th Circuit Court of Appeals in New Orleans. The appeals court has become a favorite for conservative opponents of President Joe Biden’s policies related to federal regulatory power, guns, abortion and social media regulation.

The case in Dallas is one of three lawsuits challenging the FTC’s non-compete rule and the most advanced. The others are pending in Florida and Pennsylvania, with one judge initially siding with the FTC and the other against. Neither of those suits has yet reached a final determination on the FTC’s rulemaking authority.

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The case is Ryan v. Federal Trade Commission, 3:24-cv-00986, US District Court, Northern District of Texas (Dallas).

Topics Legislation