Federal judge strikes down FTC’s ban on non-compete agreements

A federal judge in Texas ordered the US Federal Trade Commission to not enforce its partial ban on non-compete agreements on Tuesday, agreeing with the Chamber of Commerce that the FTC move “exceeded its statutory authority,” was “arbitrary and capricious” and that the proposed FTC rule would have caused businesses “irreparable harm.”

The ruling was highly anticipated because the same judge in July temporarily suspended the rule.

The FTC is “seriously considering a potential appeal,” it said in a statement.

That appeal would likely go to the US Supreme Court, but that court’s recent decision setting aside the so-called Chevron deference makes observers suppose that the court won’t side with the FTC.

“Regardless of when the FTC appeals, the Supreme Court’s recent Loper Bright decision handed down on June 28, 2024, is expected to make an FTC appeal or ultimate success on the merits more challenging,” said an analysis of the case posted by the White & Case law firm. “Loper Bright overruled long-standing precedent under which courts afford deference to a federal agency’s interpretation of its own power, known as Chevron deference. Without Chevron deference now, the FTC’s legal arguments in support of its authority to promulgate the rule are on equal footing as the plaintiffs arguing that the FTC overstepped.”

The FTC on Wednesday said it was exploring two ways to try and continue fighting against non-compete agreements.

“We are seriously considering a potential appeal and today’s decision does not prevent the FTC from addressing noncompetes through case-by-case enforcement actions,” said FTC spokesperson Victoria Graham. 

But another FTC official, who asked to not be identified, said that an appeal could be based on conflicting rulings from two federal courts. 

On Aug. 14, a Florida federal judge came to the same conclusion that the Texas federal judge did in blocking the non-compete rule. But on July 23, a federal judge in Pennsylvania went the other way and ruled that the FTC was correct in issuing the non-compete rule. 

The FTC source cited the conflicting rulings as the justification for an appeal. 

In the decision handed down by US District Judge Ada Brown in Dallas, the judge said that the power to regulate such matters rests with either the states or congress and not a federal commission. 

“States have statutory provisions or case law that ban or limit the enforceability of non-competes for workers in certain specified occupations. No federal law broadly addresses the enforceability of non-competes,” the judge wrote. “By a plain reading, [Congress] does not expressly grant the commission authority to promulgate substantive rules regarding unfair methods of competition.”

The judge added that the FTC may have limited authority to make such rules, but that the FTC went too far. “The Court concludes the FTC has some authority to promulgate rules to preclude unfair methods of competition. Indeed, the Act alludes to this power in Section 18. However, after reviewing the text, structure, and history of the act, the Court concludes the FTC lacks the authority to create substantive rules through this method.”

“The Commission’s lack of evidence as to why they chose to impose such a sweeping prohibition—that prohibits entering or enforcing virtually all non-competes — instead of targeting specific, harmful non-competes, renders the Rule arbitrary and capricious,” the judge wrote. 

Also, the court ruled, “the lack of a penalty included with Section 6(g) supports that such provision encompasses only housekeeping rules—not substantive rulemaking power.” He added: “Agencies are creatures of Congress. The Court must look to what Congress explicitly gave the FTC the authority to do. The Court concludes that the structure and the location of Section 6(g) indicate that Congress did not explicitly give the Commission substantive rulemaking authority.”