Judge Strikes Down FTC Ban on Noncompete Agreements

The Federal Trade Commission building in Washington, on Sept. 19, 2006. Paul J. Richards/AFP via Getty Images

A federal judge ruled against a Federal Trade Commission (FTC) ban on noncompete agreements, set to go into effect next month, saying that the rule was “unreasonably overbroad without a reasonable explanation.”

A noncompete agreement is an employment contract stating that workers must not compete with their employer after their job contracts end, such as by working for a competitor or in a specific market. The FTC estimates that roughly 20 percent of U.S. workers, or around 30 million individuals, have signed such agreements.

In April, the agency voted to adopt a near-total ban on noncompete provisions in employment contracts. It issued a final rule, calling such agreements an “unfair method of competition.”

In the same month, the U.S. Chamber of Commerce, together with other plaintiffs, challenged the rule in a lawsuit, claiming that the FTC lacks the authority to issue such a ban.

They argued that the ban would place burdens on business owners who want to protect their intellectual property.

In July, Judge Ada Brown of the U.S. District Court for the Northern District of Texas issued a preliminary order that temporarily blocked the rule, stopping short of barring it from coming into effect.

On Tuesday, Judge Brown sided with the plaintiffs in the case, blocking the FTC rule.

The court ruled that the FTC “lacks statutory authority to promulgate the Non-Compete Rule and that the Rule is arbitrary and capricious. Thus, the FTC’s promulgation of the Rule is an unlawful agency action.”

Plaintiffs in the case challenged FTC claims that the agency has substantive rulemaking authority under Section 6(g) of the FTC Act. The agency also argued that the Federal Trade Commission Improvements Act of 1980 confirmed such authority.

The court rejected such arguments, noting that “the role of an administrative agency is to do as told by Congress, not to do what the agency thinks it should do.”

The court ruled that the FTC ban on noncompete agreements “shall not be enforced or otherwise take effect on its effective date of September 4, 2024, or thereafter.”

Noncompete Versus Competition

The U.S. Chamber of Commerce hailed the latest ruling as a significant win for American businesses against “government micromanagement,” in a press release on Tuesday.

“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,” Chamber of Commerce President Suzanne P. Clark said.

The Chamber of Commerce said noncompete agreements protect investments in research and development while reducing free-riding, which cannot be adequately secured through nondisclosure agreements or trade-secret suits. The group added that 46 states, in addition to Washington, permit noncompete clauses, noting that this has “traditionally been an issue of state law.”

When the FTC issued the final rule, it argued that noncompete clauses promote competition, while protecting workers’ right to switch jobs.

“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,” FTC Chair Lina M. Khan said.

In the press release published earlier this year, the FTC claimed that banning noncompete agreements would lead to new business growth of 2.7 percent in the American economy. This, in turn, would “result in higher earnings for workers, with estimated earnings increasing for the average worker by an additional $524 per year, and it is expected to lower health care costs by up to $194 billion over the next decade.”

The federal agency also said there would be an estimated average increase of 17,000 to 29,000 more patents each year for the next 10 years.

The decision to adopt the noncompete ban was voted 3–2 on April 23, with the two FTC Commissioners on the panel, Andrew Ferguson and Melissa Holyoak, voting against the rule.

Seth Price, founding partner of the Washington-based Price Benowitz LLP and founder of BluSharkDigital.com, said that he understands both perspectives.

“As a former television reporter, I was subject to noncompete agreements, but now I own companies that may call for them. There should be a balance,” Mr. Price said in an article for The Epoch Times in May.

He said that noncompete clauses are typically outside the scope of lawful business interests and are rarely enforced for low-level positions, such as secretarial or janitorial work. However, an employee in whom a company has invested thousands, if not millions, to build a brand and promote organizational goals requires different considerations.

Russ Jones contributed to this report.