FTC’s Ban on Noncompete Agreements in Doubt After Texas Court Ruling

The future of a controversial rule from the Federal Trade Commission (FTC) that bans noncompete agreements throughout the United States is uncertain following a new court order.

Dallas-based U.S. District Judge Ada Brown has issued a preliminary injunction that prevents the FTC from enforcing the ban against plaintiffs that are suing the agency to have the rule struck down. Those plaintiffs include business groups, such as the U.S. Chamber of Commerce, and Ryan, a global tax services firm and software provider.

Brown stopped short of barring the FTC from enforcing the noncompete ban against all employers nationally, but granted the injunction after preliminarily concluding that the commission lacks the authority to promulgate the rule, making it likely that Ryan and the business groups will prevail in their lawsuit.

“The role of an administrative agency is to do as told by Congress, not to do what the agency thinks it should do,” Brown wrote in her order, which elaborated that Congress did not give the FTC substantive rulemaking authority under the FTC Act.

If the plaintiffs succeed in their legal challenge, it’s probable that the FTC would be prohibited from enforcing the rule against any employer, including those in the promo products industry, in which the regulation has stirred controversy, eliciting both concern and praise. Brown is expected to issue a final ruling by Aug. 30, just a few days before FTC enforcement is set to begin on Sept. 4.

John Smith, chief legal officer and general counsel for Ryan, called Brown’s preliminary injunction an “important step toward invalidating a rule that burdens not only Ryan, but also Ryan’s clients and multitudes of employers and employees across America … Ryan will pursue a final decision on the merits that strikes down the FTC’s unlawful ban.”

An FTC spokesperson said the commission has “clear authority” to ban noncompete clauses.

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

If Brown prohibits the FTC from enforcing the ban in her final order, the agency is likely to appeal that ruling. Legal analysts said the case could wend through the U.S. Courts of Appeal and perhaps to the U.S. Supreme Court.

Another case challenging the FTC’s noncompete regulation was filed in federal court in Pennsylvania by the business ATS Tree Services. As in the Texas case, ATS is asking for a preliminary injunction that would prevent enforcement of the rule. Oral arguments on the injunction request in the Pennsylvania case are scheduled for July 10.

Brown’s July 3 ruling in the Texas case came several days after the U.S. Supreme Court issued a ruling that weakened federal agencies’ regulatory authority – a decision some legal experts say will make it even more difficult for the FTC to keep its noncompete ban on the books.

“The power has shifted to people challenging the FTC,” said Chuck Machion, senior vice president and senior counsel at ASI.

The FTC banned noncompete agreements in April 2024, voiding existing clauses for all workers besides senior-level executives and preventing new noncompetes. A noncompete agreement prohibits workers from taking another job or starting a business in a profession that competes with their previous employer.

The FTC says about 30 million workers in America are subject to noncompete agreements. Banning them will generate more start-up businesses, lead to more patents and generally increase wages for workers, according to the FTC.