Judge Stays FTC’s No-Compete Order

FTC

The judge found that Congress did not authorize the FTC to prohibit non-compete agreements.

WASHINGTON, July 5, 2024 – A federal judge in Texas on Wednesday forbidden Federal Trade Commission from enforcing its ban on non-compete clauses in employment contracts that purport to include 30 million American workers.

US District Judge Ada Brown found that the FTC did not receive statutory authority from Congress to adopt such a prohibition as an unfair method of competition under Section 6(g) of the Federal Trade Commission Act.

“Section 6(g) is essentially a ‘housekeeping statute,’ authorizing what (the Administrative Procedure Act) refers to as ‘rules of procedure or practice of agency organization,’ as opposed to ‘rules of substance,’” Brown said.

She added that since Article 6(g) lacks provisions on punishment, it also has no substantive force.

The FTC rule was set to go into effect on September 4, immediately invalidating the vast majority of noncompetes nationwide. Noncompetes that applied to senior executives earning at least $151,163 a year were exempt but could not be renewed under the rule.

Under current federal law, the FTC has no authority over public carriers. The Federal Communications Commission’s new net neutrality rules — which have not gone into effect — classified broadband internet service providers as public carriers, taking away the FTC’s jurisdiction that applied when broadband internet service providers were classified as information service providers under communications law.

The FCC adopted net neutrality rules on April 25. Five days later, the FTC and FCC reached an agreement stating that despite the net neutrality rules, the FTC “will continue to have jurisdiction over the activities of non-common carriers conducted by common carriers.”

However, the FTC-FCC agreement will be suspended until the net neutrality rules take effect on July 22. Internet service provider trade associations have asked the U.S. Court of Appeals for the Sixth Circuit to suspend the rules until July 15.

In her order, Brown limited the scope for now 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. Individual members of the plaintiff-intervenors were not included in Brown’s order.

Brown issued a preliminary injunction and stayed the Sept. 4 effective date. Brown said she will issue a new ruling on the merits of the case before Aug. 30.

But judging by her analysis so far, Brown seemed poised to block the FTC rule because she figured the plaintiffs would suffer irreparable harm and would likely win the case on the merits.

“The role of an administrative agency is to do what Congress directs, not to do what the agency thinks it should do,” Brown said. “The court finds that there is a substantial likelihood that the rule is arbitrary and capricious because it is unreasonably broad without a reasonable explanation.”