Federal Court Strikes Down FTC Non-Compete Ban
A federal judge in Texas yesterday set aside the Federal Trade Commission’s (FTC) ban on non-compete agreements and blocked its enforcement. The Non-Compete Clause Rule, which was to take effect on September 4, prohibited employers from entering new non-compete agreements with workers and required the recission of existing non-compete clauses.
U.S. District Judge Ada Brown ruled that the FTC lacked the authority to enact the ban, saying it was “unreasonably overbroad without a reasonable explanation” and violated the federal Administrative Procedures Act.
The ruling is a significant blow for the FTC, which had argued that non-competes harm workers and depress wages. The commission estimated in its final rule that some 30 million American workers are subject to post-employment non-competes. In response to the court’s decision, the FTC said it would still look to protect employees through case-by-case enforcement actions.
The FTC also is expected to appeal the court’s decision to the conservative, business-friendly U.S. Court of Appeals for the Fifth Circuit. Appellate review is likely, because a federal judge in Pennsylvania sided preliminarily with the FTC a few weeks ago, while another federal judge in Florida initially ruled against the commission. Neither the Pennsylvania nor Florida cases have been finally decided.
“Yesterday’s decision reflects the power of the federal courts to overrule agency actions now that the U.S. Supreme Court has struck down the Chevron doctrine,” said ILMA CEO Holly Alfano.
“ILMA members, as employers, can breathe a sigh of relief.”
Judge Brown cited the Supreme Court ruling in her decision.
The court’s ruling effectively restores the status quo by removing the federal regulatory floor for non-compete agreements. However, the decision does not affect state laws that regulate post-employment restrictive covenants. As noted by the court, “States have historically regulated non-competes through caselaw and statute.” Because a number of states have laws that limit the use of non-compete clauses, ILMA General Counsel Jeff Leiter recommends that members should continue to be thoughtful about narrowly tailoring non-competes, non-solicitation, confidentiality agreements and other post-employment restrictive covenants in these jurisdictions.