US Judge Rejects FTC Ban on Non-Compete Agreements

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A U.S. judge has banned the Federal Trade Commission from entering into non-compete agreements, saying the regulator lacks the authority to stop agreements that prevent employees from getting new jobs at rival companies.

“The rule is arbitrary and capricious because it is unreasonably broad without reasonable explanation,” U.S. District Judge Ada Brown of the Northern District of Texas wrote in her decision Tuesday, concluding that the regulator “lacked the statutory authority” to issue the rule.

FTC spokeswoman Victoria Graham said in a statement that the agency was “disappointed” with the decision but vowed to “continue to fight to stop anti-competitive practices.”

“We are seriously considering a potential appeal, and today’s decision does not preclude the FTC from addressing non-compete claims through enforcement actions on a case-by-case basis,” Graham said.

The Federal Trade Commission, which enforces antitrust laws and regulates competition, voted 3-2 to pass the rule in April. The rule, set to take effect in September, would eliminate provisions that bar workers from working for an employer’s competitor or starting a competing business for a certain period of time or in certain areas, affecting industries from health care and engineering to finance.

The rule would increase competition, limit employers’ ability to suppress wages and help spark innovation, the agency said. The FTC estimated at the time that about 30 million workers in the United States, about 20 percent of the nation’s workforce, were bound by noncompete clauses.

Business groups challenged the FTC on the ban shortly after it was published, saying they could not protect trade secrets without non-compete clauses. They also alleged that the FTC had greatly exceeded its legal authority by issuing such a broad rule that could invalidate millions of contracts.

Courts have reached mixed decisions on the agreement: A Florida court issued a limited preliminary injunction against it, while a Pennsylvania judge declined to do the same, finding that the FTC had reasonably concluded that the agreements were almost entirely unjustified.

The Texas lawsuit arose from a challenge brought by a local company, Ryan LLC, which was later joined by several business groups, including the U.S. Chamber of Commerce and the Business Roundtable.

Brown, the judge in the Texas case who was appointed by then-President Donald Trump in 2019, wrote that the FTC had failed to justify why it banned nearly all forms of noncompete rather than “targeting specific harmful forms of noncompete.”

“Under this rule, the FTC gained broad authority over the labor relationship and the American economy,” said Eugene Scalia, a former Trump administration labor secretary and partner at Gibson Dunn who represented the plaintiffs, after the decision. “But Congress never gave it that authority, and the Court applied familiar basic legal principles to strike down the rule.”

“Today, special interests and big business worked together to prevent nearly 30 million hardworking Americans from getting better jobs or starting small businesses,” White House press secretary Karine Jean-Pierre said in a statement Tuesday. “The Biden-Harris Administration will continue to fight for workers to be able to choose where they work, start a business, and get the pay they deserve, and continues to support the FTC’s ban on non-compete agreements.”