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Judge Backs Challenge to Federal Trade Commission’s Noncompete Ban, at Least for Now

New York Times. July 3, 2024.

A federal judge on Wednesday backed an initial legal challenge to the Federal Trade Commission’s ban on noncompete agreements, which is scheduled to take effect in September.

Judge Ada Brown granted an injunction requested by several plaintiffs, saying the ban cannot be enforced against them pending a final ruling.

But while the ruling is preliminary, she said that the Federal Trade Commission lacked “substantive rule-making authority” with respect to unfair methods of competition and that the plaintiffs were “likely to succeed on the merits” of their challenge.

Judge Brown, of U.S. District Court for the Northern District of Texas, said she expected to issue a final decision by the end of August.

The commission “stands by our clear authority, supported by statute and precedent, to issue this rule,” said Douglas Farrar, an Federal Trade Commission spokesman. He added that the agency would “keep fighting” noncompetes in an effort to promote worker mobility and economic growth.

In April, the tax firm Ryan L.L.C. sued to block the near-total ban on noncompetes, just hours after the Federal Trade Commission voted 3 to 2 to adopt the rule. The U.S. Chamber of Commerce later joined the case as a plaintiff, as did the Business Roundtable and two Texas business groups.

Banning noncompete agreements, which prohibit workers from switching jobs within an industry, would increase workers’ earnings by at least $400 billion over the next decade, the Federal Trade Commission estimates. The agreements affect roughly one in five American workers, or around 30 million people, according to the agency, whose purview includes antitrust and consumer protection issues.

“If you’re not working in the most productive place you could be working because of a noncompete, that’s a loss for the economy,” Aviv Nevo, director of the Federal Trade Commission’s Bureau of Economics, said at a conference in April.

Business groups argue that the ban would limit their ability to protect trade secrets and confidential information. The Chamber of Commerce and other groups assert that the Federal Trade Commission lacks constitutional and statutory authority to adopt its proposed rule, with Ryan L.L.C. calling it “arbitrary, capricious, and otherwise unlawful.” Another lawsuit seeking to block the rule is pending in federal court in Pennsylvania.

But the three Democrats on the five-member commission maintain that it can legally issue rules defining unfair methods of competition under the Federal Trade Commission Act of 1914, the law that created the agency. Their position has garnered some bipartisan support, too: Representative Matt Gaetz, Republican of Florida, argued in a brief filed in the Texas case that the noncompete ban falls “squarely within” the rule-making authority granted to the commission by Congress

The Supreme Court’s decision last week to limit the broad regulatory power of federal agencies could raise the agency’s legal hurdles.

As litigation over the noncompete rule drags on, some lawyers are already advising employers to start relying more heavily on different agreements to protect trade secrets and business interests

In a blog post after the Federal Trade Commission adopted its noncompete ban, the law firm Winston & Strawn suggested that employers adopt alternative measures, such as narrowly tailored nondisclosure agreements and requirements that employees repay the company for training costs if they leave before a set period — known as training repayment agreement provisions

“Focus on these additional protections has become greater,” said Kevin Goldstein, an antitrust partner at Winston & Strawn

But even those agreements are under increasing scrutiny. The commission’s final rule encompasses “de facto noncompetes” — measures that, in effect, prevent a worker from switching jobs within an industry, even if they aren’t labeled noncompete