Trump-appointed judge blocks rule banning noncompetes in employment contracts

Just days before a new Federal Trade Commission (FTC) rule was set to go into effect, a Donald Trump-appointed judge blocked the rule that would have banned noncompete clauses in employment contracts.

The rule, which prevents employers both from entering into new noncompetes and from enforcing existing noncompete contracts, would have gone into effect Sept. 4.

Noncompete clauses in employment contracts typically restrict an employee from working for a competitor or starting a similar business for a set period of time after leaving a position. An estimated 20% of workers, or 30 million Americans, are bound by such contracts.

The FTC announced the new rule in April, calling noncompetes a restriction on “workers’ fundamental freedom to leave for a better job or to start their own business.”

The agency noted that, “[i]n many cases, noncompetes are take-it-or-leave-it contracts that exploit workers’ lack of bargaining power and coerce workers into staying in jobs they would rather leave, or force workers to leave a profession or even relocate,” and estimated that without noncompetes, wages for American workers would increase by $400 billion over the next decade.

Ryan LLC, a tax services and software provider, sued in federal court in Texas to stop the rule from taking effect, and the lawsuit was joined by multiple business groups including the U.S. Chamber of Commerce, Business Roundtable, and the Texas Association of Business.

U.S. District Judge Ada Brown granted the plaintiffs’ motion for summary judgment Tuesday, permanently blocking the FTC rule nationwide. Brown reasoned that the FTC overstepped its authority when it approved the ban.

“The FTC lacks substantive rulemaking authority with respect to unfair methods of competition,” Brown wrote in a 27-page decision. “The role of an administrative agency is to do as told by Congress, not to do what the agency think[s] it should do.”

Curtailing the power of administrative agencies has been a conservative agenda item for some time, and Brown’s ruling that the FTC’s authority to regulate “unfair or deceptive acts or practices” does not extend to the noncompete arena falls squarely in line with recent precedent similarly blocking agency regulations.

FTC spokesperson Victoria Graham said in a statement Wednesday that the agency is “seriously considering a potential appeal.”

“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,” Graham continued.

The Chamber of Commerce said in a statement that the decision was a “significant win” in its fight against “government micromanagement of business decisions.”

The statement continued:

A sweeping prohibition of noncompete agreements by the FTC was an unlawful extension of power that would have put American workers, businesses, and our economy at a competitive disadvantage. We remain committed to holding the FTC — and all agencies — accountable to the rule of law, ensuring American workers and businesses can thrive.

California, Minnesota, North Dakota and Oklahoma ban noncompetes under state law. Nine states other states and Washington, D.C., restrict noncompetes based on an employee’s income level, 25 states have other restrictions on noncompetes, and 12 states have no restrictions.

You can read the full ruling here.