Federal judge strikes down FTC ban of most noncompete clauses

A federal judge in Texas on Wednesday struck down the Federal Trade Commission’s proposed ban of most noncompete clauses in employment agreements.

Judge Ada Brown issued the ruling in a case filed by the U.S. Chamber of Commerce and other plaintiffs, contending the law would “undermine” businesses’ ability to remain competitive.

Brown sided with corporate interests on Aug. 20, granting the chamber’s request for summary judgment in the case. She contended that the commission lacked evidence on why such a “sweeping prohibition” is necessary rather than “targeting specific, harmful noncompetes.”

“In sum, the court concludes that the FTC lacks statutory authority to promulgate the noncompete rule and that the rule is arbitrary and capricious,” wrote Brown, a Trump administration appointee with the U.S. District Court for the Northern District of Texas. “Thus, the FTC’s promulgation of the rule is an unlawful agency action.”

The Texas judge also granted a preliminary injunction against the noncompete ban in July, with the decision only applying to the plaintiffs. The U.S. Chamber of Commerce applauded the ruling Tuesday.

“This decision is a significant win in the chamber’s fight against government micromanagement of business decisions,” President and CEO Suzanne P. Clark, MBA, said in a statement. “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. We remain committed to holding the FTC—and all agencies—accountable to the rule of law, ensuring American workers and businesses can thrive.”

Following the ruling, FTC spokeswoman Victoria Graham said the chamber is considering an appeal.

“Today's decision does not prevent the FTC from addressing noncompetes through case-by-base enforcement actions," Graham said in a statement shared by Reuters.

The noncompete ban—which some radiologists and other physicians celebrated earlier this year—was slated to go into effect Sept. 4. It offered a few exemptions, including for senior executives (defined as anyone earning more than $151,164 per year who is in a “policymaking position”). Meanwhile, a Pennsylvania judge in July declined to block the FTC ban in a separate lawsuit against the commission. These dueling decisions make it likely there will be further appeals, with the high court potentially considering the matter.

“The decisions in each of these cases are likely to be appealed, and any circuit split increases the likelihood that the Supreme Court would need to resolve the dispute,” experts at law firm Carter Ledyward & Milburn LLP wrote Tuesday. “For now, however, employers can put plans to comply with the FTC rule barring noncompetes on hold.” 

About 30 million U.S. workers (or 18%) are covered by such agreements, aimed at reducing unfair competition and the spread of trade secrets. The FTC claims that curtailing noncompetes will lead to a 2.7% uptick in the formation of new businesses each year. It also estimated in April that the noncompete ban would result in between $74 billion to $194 billion in reduced spending on physician services over the next decade.

Healthcare concerns such as the American Hospital Association and AMGA (formerly the American Medical Group Association) have spoken out against the ban, while the American College of Emergency Physicians has fought for it. The Radiology Business Management Association and American College of Radiology have not taken a formal position on the matter.