Federal Judge in Texas Strikes Down FTC Noncompete Ban

The U.S. District Court for the Northern District of Texas on Aug. 20 set aside the Federal Trade Commission’s (FTC’s) proposed ban on most noncompete agreements. This means the rule will not be enforced or take effect on Sept. 4 as intended.

Judge Ada E. Brown ruled that the FTC didn’t have the authority to issue such a broad action and that the rule was arbitrary and capricious.

“The Commission’s lack of evidence as to why they chose to impose such a sweeping prohibition ... instead of targeting specific, harmful noncompetes, renders the rule arbitrary and capricious,” Brown wrote.

She ruled in favor of the plaintiffs in the case: tax services and software provider Ryan LLC; the U.S. Chamber of Commerce; the Business Roundtable; the Texas Association of Business; and the Longview Chamber of Commerce. Her decision renders the injunction against the rule permanent and nationwide.

The FTC proposed the rule in April, stating that noncompete clauses suppress wages and constitute an unfair method of competition. The agency estimated that about 20% of U.S. workers (approximately 30 million people) are bound by a noncompete agreement.

The FTC’s ban would have covered all existing and new noncompete agreements for U.S. workers, with exceptions for certain industries (airlines, financial services, and nonprofits). In addition, it would have prohibited employers from creating new noncompete agreements with “senior executives,” defined as people earning more than $151,164 annually who are in a “policymaking position.”

The rule would have also required employers to provide notice to current and former workers that their noncompete clauses are no longer in effect.

Many business and employer groups, including SHRM, opposed the rule, and lawsuits were quickly filed against the rule when it was announced. SHRM and others filed amicus briefs in support of delaying the rule from going into effect while litigation was ongoing.

Employers that use noncompete agreements typically cite the need to protect trade secrets and other sensitive information from rival firms looking to poach talent.

“SHRM has been clear on this issue from the beginning, advocating for balanced business practices that protect both workers and employers,” said Emily M. Dickens, chief of staff and head of government affairs at SHRM. “The court’s decision affirms our position—like SHRM, the judge recognized that the FTC’s sweeping ban failed to explore less restrictive alternatives and ignored the positive impact noncompete agreements can have when applied appropriately. This ruling delivers much-needed clarity for businesses and workers alike, as the court found the rule to be unlawful and rightly blocked it from taking effect on September 4.”

FTC spokesperson Victoria Graham said the agency was disappointed with the ruling and is “seriously considering a potential appeal.”

She added that the “decision does not prevent the FTC from addressing noncompetes through case-by-case enforcement actions.”