Judge finds FTC lacks authority to issue rule banning non-compete agreements

A U.S. judge has ruled against the Federal Trade Commission challenging its rule banning non-compete agreements, finding that the FTC lacks “substantive” rulemaking authority.

The preliminary injunction merely blocks enforcement of the noncompete against the plaintiffs and other groups that intervened in the case, but it signals the judge believes the FTC can’t enforce the rule. The case is pending in the U.S. District Court for the Northern District of Texas, so appeals will be heard in the U.S. Court of Appeals for the 5th Circuit — which is widely considered one of the most conservative appellate courts in the country.

In April, the FTC issued a rule that would make the vast majority of current non-compete clauses unenforceable and ban future ones. The agency said non-compete clauses are “an unfair method of competition and therefore a violation of Section 5 of the FTC Act,” calling them “a common and often exploitative practice of imposing contractual terms that prevent employees from taking new jobs or starting new businesses.”

A tax services firm called Ryan, LLC sued the FTC in an attempt to block the rule. The lawsuit was joined by the U.S. Chamber of Commerce, two Texas business groups and a lobbying association representing U.S. CEOs.

In a ruling Wednesday, U.S. District Judge Ada Brown issued a preliminary injunction and postponed the effective date of the rule that applies to the plaintiffs. The rule is set to go into effect on Sept. 4, 2024. For now, the FTC’s noncompete order would apply to everyone except the entities involved in the lawsuit.

“FTC has no authority to make substantive rules”

“The issue presented is whether the FTC’s ability to issue regulations regarding unfair methods of competition includes the authority to create noun “unfair methods of competition laws,” wrote Brown, a Trump appointee.

Brown acknowledged that “the FTC has some authority to issue regulations that are intended to prevent unfair methods of competition.” However, “the text, structure, and history of the FTC Act reveal that the FTC does not have substantive rulemaking authority with respect to unfair methods of competition under Section 6(g),” she wrote.

The FTC argued that it could impose the rule using its authority under Sections 5 and 6(g) of the FTC Act. “In addition to Section 5, Congress enacted Section 6(g) of the Act, which authorized the Commission to ‘make rules and regulations to carry out the provisions’ of the FTC Act, which include prohibitions on unfair methods of competition,” the FTC said in issuing the rule.

“The FTC stands by our clear authority, supported by statute and precedent, to issue this rule,” an FTC spokesperson told Ars today. “We will continue to fight to free hardworking Americans from unlawful noncompetes that stifle innovation, stifle economic growth, trap workers, and undermine Americans’ economic freedom.”

The consumer advocacy group Public Knowledge called Brown’s ruling “the latest in a series of attacks on the administrative state that further emboldens unscrupulous judges to seize power from federal agencies and prevent them from effectively serving the American people.”

Last week, the Supreme Court overturned the conviction of the 40-year-old Chevron precedent that gave agencies leeway to interpret ambiguous regulations as long as the agency’s request was reasonable. The SCOTUS ruling effectively gives courts more power to block federal regulations.

The authority cited by the FTC is simply a “household regulation”

Brown stated that Section 6(g) is merely “housekeeping statute,” authorizing “establishment of rules of agency organization, procedures, or practices” but not “substantive rules.”

“Plaintiffs further argue that the absence of a statutory penalty for violating the rules promulgated under section 6(g) demonstrates a lack of authority to make substantive rulemaking. The Court agrees,” Brown wrote. “By authorizing legislative rulemaking, Congress has historically also imposed penalties for violations of agency rules—reaffirming that those rules create substantive obligations for regulated parties.”

The judge said the plaintiffs would likely succeed on the merits and would be harmed if the rule went into effect. Brown expects to issue a ruling on the merits by Aug. 30.

The temporary injunction is not binding nationwide because Brown elected to limit “the scope of this injunction to plaintiff Ryan, LLC and plaintiff-intervenors Chamber of Commerce of the United States of America; Business Roundtable; Texas Association of Business; and Longview Chamber of Commerce.”

The trade groups sought an injunction that would apply to all of their member entities, but they failed to persuade Brown to extend the injunction that far. “Plaintiff-Interveners have failed to ask the Court for sufficient evidence regarding their respective association members for whom they seek standing, or for any of the three elements that must be met for association standing. Without such an expanded brief, the Court declines to extend the injunction to Plaintiff-Interveners’ members,” Brown wrote.