FTC can’t enforce ban on noncompete agreements, thanks to judge in Texas

A federal judge in Texas yesterday blocked the Federal Trade Commission’s attempt to ban noncompete agreements that make it difficult for workers to change jobs or start new businesses. Judge Ada Brown in the Northern District of Texas granted a motion for summary judgment that was requested by a tax services firm and business groups such as the US Chamber of Commerce.

“The Court sets aside the Non-Compete Rule. Consequently, the Rule shall not be enforced or otherwise take effect on its effective date of September 4, 2024 or thereafter,” the ruling said.

The judge wrote in a previous ruling that the FTC lacks authority to issue a rule banning noncompete agreements and granted a preliminary injunction. But that previous ruling only postponed the effective date of the rule as it applied to the plaintiffs, whereas yesterday’s order blocks the FTC rule entirely.

Yesterday’s ruling is “a final and appealable judgment,” the court said. In Texas, appeals go to the US Court of Appeals for the 5th Circuit. The FTC is likely to have better luck in less conservative circuits. In July, a federal judge in Pennsylvania upheld the agency’s noncompete ban in a ruling that denied a motion for preliminary injunction.

“The FTC’s substantive rulemaking authority has been confirmed by circuit courts interpreting the FTC Act, as well as by Congress when it enacted its 1975 and 1980 Amendments to the Act,” the judge in Pennsylvania wrote.

FTC “seriously considering” appeal

If the FTC loses in the 5th Circuit appeals court, it would need the Supreme Court to take the case.

“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,” an FTC spokesperson said in a statement provided to Ars today. “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.”

The FTC argues that it can ban noncompete clauses as an unfair method of competition under Section 5 of the FTC Act. “Alongside section 5, Congress adopted section 6(g) of the Act, in which it authorized the Commission to ‘make rules and regulations for the purpose of carrying out the provisions of’ the FTC Act, which include the Act’s prohibition of unfair methods of competition,” the FTC said when it issued the rule in April.

The FTC said that 30 million US workers are bound by noncompete clauses. The agency rule declared the vast majority of existing noncompete clauses unenforceable while making an exception for clauses that currently apply to senior executives. The rule would have banned all future noncompete clauses for both regular workers and senior executives.

Judge: FTC can only make “housekeeping rules”

Judge Brown previously ruled that section 6(g) is just a “housekeeping statute” that authorizes “rules of agency organization procedure or practice” but not “substantive rules.” In yesterday’s order, Brown wrote:

Section 6(g) contains no penalty provision—which indicates a lack of substantive force. In contrast, Section 5 adjudications include a penalty provision. Thus, the lack of a penalty included with Section 6(g) supports that such provision encompasses only housekeeping rules—not substantive rulemaking power.

Furthermore, viewing the statute as a whole, the location of the alleged substantive rulemaking authority is suspect. First, the initial part of Section 6(g) merely vests the FTC with the power to “[f]rom time to time classify corporations;” the alleged substantive rulemaking power is the latter portion of the statute. If the FTC is correct in its interpretation, then Congress did not choose to place such substantial power in a primary, independent place. Further, Section 6(g) is the seventh in a list of twelve almost entirely investigative powers. Finally, Section 6(g) fails to mention Section 5 or any other substantive authority from where such substantive rulemaking power would stem.

“In sum, the Court concludes the text and the structure of the FTC Act reveal the FTC lacks substantive rulemaking authority with respect to unfair methods of competition, under Section 6(g),” Brown wrote later in the ruling.

The US Chamber of Commerce hailed the ruling, calling it “a significant win in the Chamber’s fight against government micromanagement of business decisions.” A lobby group for cable broadband companies also celebrated Brown’s ruling, calling it “yet another decision that makes the case against regulatory overreach.”