The Federal Trade Commission (FTC) banned noncompetes in April, saying that the agreements — which prevent a company’s employees from working for competitors or starting rival firms for a set time after their employment ends — kept salaries down and stopped Americans from creating new businesses.
Now, a Dallas U.S. district judge is blocking the ban, about two weeks before it would have taken effect on September 4.
FTC Chair Lina Khan. Photo credit: Tom Williams/CQ-Roll Call, Inc via Getty Images
U.S. District Judge Ada Brown in Dallas ruled Tuesday that the FTC lacked the authority to ban noncompetes, making the April rule “an unlawful agency action.” The judge called the rule “arbitrary and capricious” in her decision and said the FTC didn’t prove why they wanted “a sweeping prohibition” of noncompetes instead of specific bans of harmful ones.
That means the noncompete ban will not be taking effect across the country. Noncompetes affect around 30 million Americans, according to the FTC.
The FTC stated that it was “disappointed” by the decision.
“We are seriously considering a potential appeal,” stated an FTC spokesperson.
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The judge sided with the plaintiffs, including the U.S. Chamber of Commerce, the Business Roundtable, and Ryan LLC, a tax law firm. They sued the FTC on April 23, the same day the commission announced the noncompete ban.
“The Federal Trade Commission’s decision to ban employer noncompete agreements across the economy is not only unlawful but also a blatant power grab that will undermine American businesses’ ability to remain competitive,” U.S. Chamber of Commerce President and CEO Suzanne P. Clark stated at the time.
The Chamber said that noncompetes could help businesses protect their investments in worker training, research, and development and that it was pushing back against “government micromanagement” by opposing the rule.
The FTC, on the other hand, stated that banning noncompetes would open up new possibilities for American workers and lead to 8,500 new businesses per year.
Wages would increase by $524 for employees per year, 17,000 to 29,000 new patents would be filed per year, and healthcare costs would decrease by up to $194 billion over the next ten years, according to FTC estimates.
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