Dallas (CN) — A federal judge in Texas blocked a Federal Trade Commission rule Tuesday banning noncompete agreements in employment contracts.
The rule, which was set to go into effect Sept. 4, prevents employers from entering into new noncompete agreements or enforcing existing agreements, declaring them an unfair method of competition. Noncompete agreements are provisions in employment contracts that prevent employees from working at or starting competing businesses for a certain period of time after leaving their current employer.
U.S. District Judge Ada Brown, a Trump appointee, ruled the FTC lacked statutory authority to issue the rule, and that the rule was arbitrary and capricious.
Noncompete agreements started out as a way to keep high-level executives from bringing trade secrets to competitors, but they have since become more common, with some companies even requiring them for low-wage employees like fast food and retail workers. The FTC estimates that nearly one in five American workers is subject to a noncompete agreement.
“In many cases, noncompetes are take-it-or-leave-it contracts that exploit workers’ lack of bargaining power and coerce workers into staying in jobs they would rather leave, or force workers to leave a profession or even relocate,” the FTC says in a fact sheet on the rule.
In April, the Democratic-controlled FTC voted 3-2 to approve the final version of the rule, which the FTC estimates could increase Americans’ wages by $400 billion over the next decade. However, some employers have argued they need noncompete agreements to protect trade secrets and secure investments made in recruiting and training employees.
Tax services firm Ryan LLC in April filed suit in the Northern District of Texas seeking to stop the rule from taking effect. Business groups, including the U.S. Chamber of Commerce, have joined the lawsuit. On Tuesday, Brown granted summary judgment for the plaintiffs, permanently blocking the rule nationwide.
In her ruling, Brown found the FTC lacks statutory authority to issue substantive rules, which are rules issued by administrative agencies that have the force of laws, regarding unfair competition. Created in 1914 through the Federal Trade Commission Act to protect consumers and prevent unfair business competition, the FTC largely functions through administrative enforcement proceedings against specific companies.
The FTC Act gives the agency the power “to make rules and regulations for the purpose of carrying out the provisions of” the Act, but Brown held this is a “housekeeping statute” that only authorizes procedural rules governing internal agency processes, not substantive rules.
“Plainly read, the court concludes the FTC has some authority to promulgate rules to preclude unfair methods of competition,” Brown wrote in her 27-page opinion. “However, after reviewing the text, structure, and history of the Act, the court concludes the FTC lacks the authority to create substantive rules through this method.”
While a 1975 amendment to the FTC Act gave the agency the power to make substantive rules regarding “unfair or deceptive acts or practices,” this specifically refers to acts that injure or mislead consumers, and Brown ruled this power doesn’t extend to rules governing unfair competition.
Additionally, Brown found that the rule is overbroad, as it categorically bans all noncompete agreements while relying on “a handful of studies” that examine the economic effects of narrower state policies that restrict noncompetes.
“The record shows no state has enacted a noncompete rule as broad as the FTC’s Rule,” Brown wrote.
Brown also ruled that the FTC had not properly considered less restrictive alternatives before enacting the categorical ban.
In a statement, the U.S. Chamber of Commerce celebrated the ruling.
“This decision is a significant win in the Chamber’s fight against government micromanagement of business decisions,” the Chamber’s president and CEO Suzanne Clark said. “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.”
Meanwhile, FTC spokeswoman Victoria Graham said in a statement to Reuters that the agency is disappointed by the ruling and is “seriously considering a potential appeal.”
“Today’s decision does not prevent the FTC from addressing noncompetes through case-by-base enforcement actions,” Graham said.
White House Press Secretary Karine Jean-Pierre told Reuters the White House still supports the noncompete ban.
“Special interests and big corporations worked together today to prevent nearly 30 million hardworking Americans from being able to get better jobs or start small businesses,” Jean-Pierre said in a statement.