Federal judge issues narrow pause on FTC noncompete ban

A federal judge on Wednesday granted a preliminary injunction on a nationwide ban on noncompete agreements issued this spring, calling into question its future in the face of opposition by prominent business groups.

The Dallas-based tax firm Ryan LLC was joined by the U.S. Chamber of Commerce, the Business Roundtable and other business groups in a lawsuit against the Federal Trade Commission (FTC), which voted 3-2 in April to ban the common agreements that prevent tens of millions of employees from leaving to work for a competitor or start a competing business.

The final rule bans all new noncompete agreements and requires companies to tear up existing agreements, although the agency did say agreements may remain in effect for certain senior executives.

“This week, Americans celebrate our nation’s Declaration of Independence from an overreaching royal crown. Non-compete agreements predate the American Revolution, and our lawsuit seeks to preserve a robust freedom of contract for generations of enterprising Americans to come,” said John Smith, Ryan chief legal officer and general counsel. 

The ruling comes on the heels of a series of Supreme Court rulings that weakened federal agency powers, including overturning Chevron deference, the prominent precedent that empowered federal agencies to interpret ambiguous laws through rulemaking.

The ruling was notably narrow, postponing the Sept. 4 effective date of the rule “as applied to the Plaintiffs.” The U.S. District Court for the Northern District of Texas said it would “rule on the ultimate merits of this action on or before August 30, 2024.”

“The text, structure, and history of the FTC Act reveal that the FTC lacks substantive rulemaking authority with respect to unfair methods of competition,” U.S. District Judge Ada Brown wrote.

Douglas Farrar, director of the FTC’s Office of Public Affairs, told The Hill that “the FTC stands by our clear authority, supported by statute and precedent, to issue this rule.”

“We will keep fighting to free hardworking Americans from unlawful noncompetes, which reduce innovation, inhibit economic growth, trap workers, and undermine Americans’ economic liberty,” Farrar said.

Daryl Joseffer, the Chamber’s litigation center executive vice president and chief counsel, called the judge’s decision “a big win in the Chamber’s fight against government micromanagement of business decisions.”

“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. The U.S. Chamber will continue to hold the FTC accountable in court,” Joseffer said in a statement.

Updated at 6:58 p.m. ET.