Judge Rejects FTC Rule Banning Non-Compete Clauses, Citing Lack of Authority

A U.S. District Court judge in Texas on Tuesday blocked a Federal Trade Commission (FTC) Rule prohibiting non-compete agreements, which are commonly used in the mortgage and real estate industries.

Judge Ada E. Brown of the United States District Court for the Northern District of Texas granted to the applicant Ryan SARLRyan LLC, a Dallas-based tax services and software company, denied its motion for summary judgment and dismissed the FTC’s counterclaim. Ryan LLC was joined by four plaintiff-intervenors: United States Chamber of Commerce, Business Roundtable, Texas Business Association And Longview Chamber of Commerce.

“The court vacates the noncompete rule. Accordingly, the rule will not be enforced or take effect on or after its effective date of September 4, 2024,” Brown wrote in the decision. She opined that “the FTC exceeded its statutory authority” and that the rule is “arbitrary and capricious” and causes “irreparable harm.”

FTC spokeswoman Victoria Graham said in a written statement that the antitrust agency was “disappointed by Judge Brown’s decision and will continue to fight to end non-compete clauses that restrict the economic freedom of hard-working Americans, hinder economic growth, limit innovation and depress wages.”

“We are seriously considering a potential appeal, and today’s decision does not preclude the FTC from addressing non-compete clauses through enforcement actions on a case-by-case basis,” Graham added.

Brown had already temporarily blocked the rule in July. The decision is now permanent and extends nationwide. It differs from last month’s decision in Pennsylvania, which said the FTC clearly had the authority to ban non-compete clauses.

In April, the FTC issued the noncompete ban, saying it would protect “workers’ freedom to change jobs, increasing innovation and fostering new businesses.” The move follows President Joe Biden’s July 2021 executive order that urged the agency to address the issue.

FTC Chairwoman Lina Khan said in a statement when the ban was put in place that non-compete agreements “keep wages low, stifle new ideas, and rob the American economy of dynamism.” She added that more than “8,500 new startups would be created each year once non-compete clauses were banned.”

The FTC estimates that the ban would increase workers’ income by $524 a year. The antitrust agency added that about 30 million people, or about one in five American workers, have non-compete agreements.

Brown said states have historically regulated non-compete clauses (California is an example of a state that bans them), but the FTC began studying the issue in 2018. Congress has not explicitly granted the commission substantive regulatory authority, however, and the judge ruled that it does not have the statutory authority to retroactively invalidate millions of existing contracts.

Companies that use these agreements say they protect intellectual property and investments in training and professional development. In the mortgage and real estate lending industries, these contracts are typically signed by executives.

Peter Idziak, a senior partner at a mortgage law firm Polunsky’s Green Diarystated that by banning all non-compete clauses, the FTC created an unreasonably broad ban that is not supported by any evidence that they constitute an unfair method of competition.

“Instead of issuing a rule that targets specific, harmful non-compete clauses, the FTC’s blanket ban is an abuse of agency discretion. I expect Judge Brown’s conclusion will be upheld by the Fifth Circuit if the FTC chooses to appeal,” Idziak said in a statement.

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