A federal judge has blocked the implementation of the Federal Trade Commission's regulation that would have canceled nearly all existing non-compete agreements.
Tuesday's decision is a relief to employers, who continue to remain protected against employees quitting and working for direct competitors. The rule would have gone into effect on September 4.
US district judge Ada Brown in Dallas said that the FTC does not have the authority to stop competition by adopting such broad rules. She called the rule "capricious."
"The Court concludes that the FTC lacks statutory authority to promulgate the Non-Compete Rule and that the Rule is arbitrary," Brown wrote in the order.
The US Chamber of Commerce, which lobbies on behalf of businesses, hit hard against the new rule on the same day FTC announced its decision. It said that it intended to sue the FTC over what it called an "unlawful" and "blatant power grab" amounting to government "overreach."
Brown had temporarily blocked the rule in July for a small number of employers while she considered a bid by the Chamber of Commerce to strike it down.
Brown wrote that even if the FTC had the authority to adopt the rule, it would not made a case for banning virtually all non-compete contracts.
In April, the FTC voted to approve a nationwide ban on noncompete agreements, which apply to a wide range of roles, including white-collar roles and hourly wage jobs such as retail sales staff and food preparation workers.
"Noncompete clauses keep wages low, suppress new ideas, and rob the American economy of dynamism, including from the more than 8,500 new startups that would be created a year once noncompetes are banned," Lina Khan, the FTC chair, said in April.
Noncompetes prohibit employees from working at competing companies even after they leave their jobs.
The FTC says these "exploitative" practices affect about 30 million workers, often forcing them to stay in jobs they hate, relocate when they don't want to, move to lower-paying fields, leave the workforce altogether, or face expensive litigation. The move could help American workers make $300 billion more a year, the FTC has previously said.
The new rule would have voided those noncompetes. The only carve-out was for some senior executives, who only make up 0.75% of workers, the FTC said.