Federal Court Puts FTC’s Non-Compete Ban on Ice, Citing Overreach in Rulemaking Authority

A federal judge in Dallas has blocked the Federal Trade Commission’s (FTC) sweeping ban on non-compete agreements. The decision, delivered by U.S. District Judge Ada Brown, represents a significant setback for the FTC and its efforts to make labor markets more competitive by curtailing non-competes, which have become increasingly prevalent across the United States.

Judge Brown sided with the U.S. Chamber of Commerce and Ryan, LLC, a Texas-based tax firm, in their lawsuit against the FTC. The plaintiffs argued that the FTC’s rule, set to take effect on September 4, 2024, was an overreach of the agency’s authority under the Federal Trade Commission Act. Judge Brown agreed, stating that the FTC lacked the authority to enact such a sweeping ban and that the rule was "unreasonably overbroad without a reasonable explanation."

This ruling is a stark contrast to a previous decision by a federal judge in Pennsylvania, who had sided with the FTC in a similar case. The differing judicial opinions underscore the deep divide over the FTC’s regulatory powers, a division likely to propel the issue to appellate courts and potentially the Supreme Court.

A High-Wire Act for Business and Workers

The FTC’s rule, aimed at limiting the use of non-compete agreements, has been one of the most contentious regulatory moves in recent history. Non-compete clauses, which prevent employees from working for competitors or starting similar businesses after leaving a job, affect an estimated 30 million American workers, or roughly 20% of the U.S. workforce. The FTC argued that these agreements stifle competition, limit innovation, suppress wages, and restrict the economic mobility of workers.

On the other hand, businesses contend that non-competes are crucial for protecting trade secrets, client relationships, and investments in employee training. The Chamber of Commerce, which called Judge Brown’s ruling a "significant win," argued that the FTC’s rule was an "unlawful extension of power" that would disadvantage American businesses and the broader economy.

The proposed ban would have had far-reaching implications, affecting a wide range of professions, from doctors and engineers to hairstylists and salespeople. It would have effectively nullified existing non-compete agreements, significantly shifting the balance of power between employers and employees.

Appeals and Ongoing Legal Battles

The FTC has expressed its disappointment with the ruling and signaled that it may appeal the decision to the U.S. 5th Circuit Court of Appeals in New Orleans, a court known for its conservative leanings and its receptiveness to challenges against federal regulatory power. The outcome of this case, particularly if it reaches the appellate level, could set a critical precedent for the scope of the FTC’s authority and its ability to regulate employment practices nationwide.

FTC spokesperson Victoria Graham emphasized that the agency remains committed to protecting workers from the restrictive effects of non-compete agreements. “We are disappointed by Judge Brown’s decision and will keep fighting to stop non-competes that restrict the economic liberty of hardworking Americans, hamper economic growth, limit innovation, and depress wages,” Graham stated. She also noted that the ruling does not prevent the FTC from pursuing non-compete cases through individual enforcement actions, leaving the door open for the agency to continue its fight on a case-by-case basis.

The case in Dallas is the most advanced of three lawsuits challenging the FTC’s non-compete rule. The other two cases, pending in Florida and Pennsylvania, have also sparked heated debate over the limits of the FTC’s authority. While the Florida case remains unresolved, the Pennsylvania case initially resulted in a ruling favorable to the FTC, further highlighting the judiciary’s division on this critical issue.

Uncertainty and Anticipation

As the legal battle over non-competes continues, businesses and workers alike are left in a state of uncertainty. The potential for an appeal and further judicial review means that the ultimate fate of the FTC’s rule may remain undecided for some time. For now, Judge Brown’s ruling has put the brakes on the FTC’s bold attempt to reshape the landscape of non-compete agreements, raising questions about the future of federal regulation in this arena and the broader implications for labor market competition in the United States.

As the legal process unfolds, all eyes will be on the appellate courts, where the next chapter in this high-stakes regulatory battle will be written.

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