A District Court judge in Texas has granted a preliminary injunction against the Federal Trade Commission’s rule to ban noncompete agreements, saying the agency does not have the rule-making authority to enact such a rule and that the plaintiffs suing the FTC are likely to succeed on the merits of their case.
The Background: The FTC announced back in April that it was moving forward with a rule that would ban noncompete agreements that was scheduled to go into effect in August.
- The FTC estimates that 30 million workers are subject to a noncompete clause. Noncompete clauses are a way for companies to protect themselves and their interests from unfair competition.
- Under the new rule, noncompete clauses would be considered an unfair method of competition under the Federal Trade Commission Act.
- The FTC did make a couple of changes from its original proposed rule, specifically carving out an exception for senior executives. The rule defines senior executives as those making at least $151,164 per year and who are policy-making positions at their companies. Noncompete clauses for those executives can remain in place, but employers are prohibited from entering into or enforcing new noncompete clauses with senior executives.
- The FTC was sued on the grounds that it had overstepped its regulatory authority it seeking to enact the rule.
The Ruling: In a 33-page opinion, Judge Ada Brown of the District Court for the Northern District of Texas concluded that the plaintiffs are likely to succeed on the merits of their claims. The court found that the FTC lacks the statutory authority to promulgate the noncompete rule and that the rule is overly broad and not reasonably explained, thus rendering it arbitrary and capricious.
- An FTC spokesman said that, “The commission stands by our clear authority, supported by statute and precedent, to issue this rule.”
