A District Court judge in Texas has invalidated the Federal Trade Commission’s rule banning most noncompete agreements, dealing a major blow to one of the agency’s signature initiatives.
Why it matters: The ruling prevents the FTC from implementing and enforcing its sweeping ban on noncompete clauses, which was set to take effect on September 4.
Driving the news: Judge Ada Brown of the District Court for the Northern District of Texas, who was appointed to the bench by President Trump, ruled this week that the FTC exceeded its statutory authority in issuing the noncompete ban and that the rule is arbitrary and capricious.
- “The role of an administrative agency is to do as told by Congress, not to do what the agency thinks it should do,” Judge Brown wrote in her ruling.
The background: The noncompete rule, adopted in April, aimed to prohibit employers from using non-compete clauses in employment contracts, which the FTC argued hindered labor mobility and suppressed wages. The rule would have affected an estimated 30 million American workers and was expected to boost earnings by allowing more freedom for workers to switch jobs.
The ruling: Judge Brown’s ruling was rooted in the assertion that the FTC overstepped its statutory authority. She found that while the FTC is empowered to prevent unfair methods of competition under the Federal Trade Commission Act, it does not have the authority to issue substantive regulations like the noncompete rule, which seeks to ban a widespread employment practice.
Moreover, Judge Brown deemed the FTC’s rule arbitrary and capricious. The judge criticized the rule for being overly broad and unsupported by adequate evidence, noting that the FTC had failed to sufficiently explore less disruptive alternatives. The decision also highlighted the economic reliance on noncompete agreements by businesses to protect trade secrets and investments, which the FTC had not adequately considered.
Next steps: The FTC said it is considering an appeal of the ruling to the Court of Appeals for the Fifth Circuit.
