Federal judge strikes down FTC rule banning noncompete agreements
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A federal judge in Texas on Tuesday struck down the Federal Trade Commission’s ban on noncompete agreements, finding that the agency exceeded its authority with a rule that would have voided contracts that bar workers from moving to rival employers.
In a 27-page opinion, U.S. District Judge Ada Brown found that the FTC lacked the statutory authority to issue the rule, which would have taken effect Sept. 4. In reaching her decision, Brown wrote that the “FTC’s promulgation of the Rule is an unlawful agency action.”
An estimated 30 million U.S. workers in a wide range of fields are subject to noncompete agreements.
The FTC in April voted 3-2 to issue the rule, with commissioners in the majority pointing to evidence that the agreements suppress wages, stifle entrepreneurship and gum up labor markets. If it had gone into effect, the rule would have made it illegal for employers to include the agreements in employment contracts and would have invalidated existing clauses for most workers subject to them.
“We are disappointed by Judge Brown’s decision and will keep fighting to stop noncompetes that restrict the economic liberty of hardworking Americans, hamper economic growth, limit innovation, and depress wages,” FTC spokeswoman Victoria Graham said in an email. “We are seriously considering a potential appeal, and today’s decision does not prevent the FTC from addressing noncompetes through case-by-base enforcement actions.”
Brown, who was appointed by President Donald Trump, hinted at her thinking last month, when she temporarily blocked the noncompete rule. Brown wrote in her opinion Tuesday that, in addition to exceeding its authority, the FTC issued the rule based on “inconsistent and flawed empirical evidence,” while failing to consider evidence supporting noncompete clauses. She also wrote that the agency failed to find alternatives to the ruleit issued.
“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.
Brown’s opinion stands in contrast to a Pennsylvania judge’s ruling last month that rejected a similar challenge. In denying a Pennsylvania-based tree-care company’s bid for a preliminary injunction against the FTC rule, U.S. District Judge Kelley Brisbon Hodge, who was appointed by President Joe Biden, found that the FTC agency was well within its authority to issue it.
In a third case, a federal judge in Florida last week blocked the FTC rule – but only for the plaintiffs in that specific instance.
Julie Levinson Werner, an employment attorney and partner at Lowenstein Sandler in New York, said the varying opinions and likely appeals in the three cases make it probable that the noncompete rule will eventually be reviewed by the Supreme Court. But for now, the Texas court’s ruling puts the law around noncompetes back to the status quo, Werner said.
“Everybody who was under the impression that they were going to have to initiate sending out notices to employees and telling them that their noncompetes were no longer in effect are not required to do that,” she said.
Although the FTC’s national ban has been struck down, individual state restrictions on noncompete agreements remain in effect. For example, California, North Dakota and Oklahoma have had at least some prohibitions on noncompete clauses for more than a century. Laws in other states stipulate that noncompete agreements cannot be used for employees falling below a certain salary threshold or earning an hourly wage.
The Texas challenge was brought by Ryan LLC, a global tax-consulting firm headquartered in Dallas. The firm was later joined by business groups including U.S. Chamber of Commerce, the Business Roundtable, the Texas Association of Business and the Longview Chamber of Commerce.
The U.S. Chamber cheered its victory Tuesday.
“This decision is a significant win in the Chamber’s fight against government micromanagement of business decisions,” Chamber President and CEO Suzanne P. Clark said. “A sweeping prohibition of noncompete agreements by the FTC was an unlawful extension of power that would have put American workers, businesses, and our economy at a competitive disadvantage.”