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A US judge has blocked a Federal Trade Commission non-compete order, saying the regulator does not have the power to block agreements that prohibit employees from working for a rival company.
In a ruling on Tuesday, U.S. District Judge Ada Brown of the Northern District of Texas wrote that the rule was “unreasonably broad and arbitrary and capricious without a reasonable explanation,” and concluded that regulators “lacked the legal authority” to issue it.
In a statement, FTC spokeswoman Victoria Graham said the agency was “disappointed” with the decision but vowed to “continue to fight to block non-compete clauses.”
“We are seriously considering a possible appeal, and today’s decision does not preclude the FTC from addressing non-compete clauses through individual enforcement actions,” Graham said.
The FTC, which enforces antitrust laws and regulates competition, voted 3-2 in April to issue the rules. The rules, which are set to take effect in September, will void provisions that prohibit workers from working for or starting a rival company of their employer for a certain period of time or in a certain geographic area, affecting industries such as healthcare, engineering and finance.
The FTC said the rule would promote competition, limit employers’ ability to suppress wages, and encourage innovation. At the time, the FTC estimated that about 30 million U.S. workers, or 20 percent of the nation’s workforce, were bound by non-compete clauses.
Business groups challenged the ban shortly after it was announced, arguing that trade secrets cannot be protected without non-compete clauses and that the FTC had overstepped its legal authority by issuing such sweeping rules that could invalidate millions of contracts.
Courts have made mixed decisions on this issue: A Florida court issued a limited preliminary injunction, while a Pennsylvania judge refused to issue a similar order, saying the FTC had reasonably concluded that the agreement was largely unjustified.
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The Texas lawsuit stemmed from a challenge filed 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 overseeing the Texas case who was appointed by then-President Donald Trump in 2019, wrote that the FTC had failed to justify why it banned virtually all non-competes “rather than targeting specific harmful non-competes.”
“This rule gave the FTC significant power over employment relations and the American economy,” Eugene Scalia, a former labor secretary in the Trump administration and a partner at Gibson Dunn law firm representing the plaintiffs, said after the ruling. “But Congress never gave the FTC that power, and the Court applied well-known and fundamental legal principles to strike down the rule.”
White House press secretary Karine Jean-Pierre said in a statement Tuesday, “Today, special interests and big corporations colluded to prevent nearly 30 million hardworking Americans from getting a better job or starting a small business. The Biden-Harris Administration will continue to fight for workers to choose where they work, start a business, and get paid what they’re fair, and we will support the Federal Trade Commission’s ban on non-compete agreements.”
