Judge Strikes Down FTC’s Ban on Noncompete Employment Agreements, Calling It ‘Arbitrary and Capricious’

A federal judge shot down the FTC’s rule banning noncompete agreements, a setback for the agency’s effort to free workers from restrictive employment contract terms. The commission said it is considering an appeal.

The FTC issued a rule banning noncompete clauses in employment contracts in the U.S. in April, and the action was immediately challenged in court. On Tuesday, Judge Ada Brown of the U.S. District Court in Dallas ruled that the FTC’s rule was “unreasonably overbroad without a reasonable explanation.” The new rule had been set to go into effect Sept. 4.

“The Court concludes that the FTC lacks statutory authority to promulgate the Non-Compete Rule, and that the Rule is arbitrary and capricious. Thus, the FTC’s promulgation of the Rule is an unlawful agency action,” Brown wrote in her decision. The judge said the commission failed to furnish evidence about “why they chose to impose such a sweeping prohibition” instead of “targeting specific, harmful non-competes,” thereby rendering the rule “arbitrary and capricious.”

A copy of Brown’s ruling is available at this link. Tax-services firm Ryan LLC, joined by the U.S. Chamber of Commerce and the Business Roundtable lobbying groups, had sued the FTC over the noncompete ban on April 23, the same day the commission announced the rule.

On July 3, Brown issued a preliminary injunction blocking enforcement of the FTC ban after finding “there was a substantial likelihood that Plaintiffs would succeed on the merits” and that the rule would “cause irreparable harm.”

The FTC said it is “seriously considering a potential appeal” to the ruling. “We are disappointed by Judge Brown’s decision and will keep fighting to stop noncompetes that restrict the economic liberty of hardworking Americans, hamper economic growth, limit innovation, and depress wages,” a spokesperson for the agency said in a statement.

The White House also weighed in on the issue, reiterating its backing of the FTC’s ban on noncompete agreements. “The Biden-Harris Administration will keep fighting to empower workers to choose where they work, to start a business, and to get the pay they deserve, and continues to support the Federal Trade Commission’s ban on noncompete agreements,” White House press secretary Karine Jean-Pierre said in a statement to Reuters.

According to the FTC, 30 million U.S. workers, nearly one in five Americans, are subject to a noncompete agreeement. The ban would make existing noncompete agreements for the “vast majority” of workers unenforceable, the FTC said. Existing noncompetes for employees deemed to be senior executives — who represent less than 0.75% of workers, according to the agency — would remain in force under the FTC’s final rule, but employers will be prohibited from entering into or attempting to enforce any new noncompetes, even if they involve senior executives. Employers will be required to provide notice to workers other than senior executives who are bound by an existing noncompete that they will not be enforcing any noncompetes against them.

The FTC’s vote in favor of the noncompete ban broke along party lines. The three Democratic commissioners (FTC Chair Lina Khan, Rebecca Kelly Slaughter and Alvaro Bedoya) voted yes; the two Republican commissioners (Melissa Holyoak and Andrew Ferguson) voted no.