The Federal Trade Commission’s new rule banning employers from imposing non-compete clauses on their employees has been partially blocked by a federal judge in Texas.

On July 3, U.S. District Judge Ada Brown said in a written decision that the FTC “lacks the substantive rulemaking authority with respect to unfair methods of competition.” As a result, Brown granted a motion for a preliminary injunction preventing the rule from taking effect in September while the court considers if the FTC actually has the power to issue the ban.

  • The motion was requested by tax preparation company Ryan LLC and the U.S. Chamber of Commerce, which filed a lawsuit just one day after the FTC’s 3-2 vote.
  • The order prevents the rule from being enforced specifically against Ryan and the Chamber – Brown denied their request to block the rule nationwide.

Brown said she would issue a final ruling by August 30, a few days before the rule is set to take effect.

“This ruling is a big win in the Chamber’s fight against government micromanagement of business decisions,” says Daryl Joseffer, executive vice president and chief counsel of the U.S. Chamber of Commerce Litigation Center.

“The FTC’s blanket ban on non-competes 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.”

Meanwhile, FTC spokesman Douglas Farrar said the agency stands by its “clear authority” to issue the rule. “We’ll keep fighting to free hardworking Americans from unlawful non-competes, which reduce innovation, inhibit economic growth, trap workers and undermine Americans’ economic liberty,” Farrar says.

Breaking Down The FTC Ruling

Non-compete clauses are a contractual term between an employer and a worker that blocks the worker from working for a competing employer or starting a competing business, typically within a certain geographic area and period of time after the worker’s employment ends.

  • About 30 million people (20% of U.S. workers) have signed non-competes, according to the FTC.
  • The FTC’s ruling leaves existing non-competes with senior executives intact while banning future non-competes for top corporate officials.

In February, PPAI Media listed non-compete clauses as one of the key employment areas to watch in 2024 after the FTC proposed the legislation that this ban initially stemmed from in January.

Last year, Joshua White – then the head of strategy and general counsel at BAMKO and a member of the PPAI Board of Directors – wrote a column for PPAI Media arguing against non-compete contracts as a practice in promo and predicting the FTC’s decision.

“The point here is not to challenge your opinion on non-competes,” White wrote. “I expect the FTC will take that issue out of your hands soon enough. My point is to challenge the way you think about people, culture and the role you play in shaping both.”

  • California, Minnesota, Oklahoma and North Dakota have already banned noncompete agreements, and at least a dozen other states have passed laws limiting their use, Reuters reported.
  • The FTC’s rule would be the first nationwide prohibition of non-competes.