The FTC rule could affect as many as millions of workers outside the scope of the lawsuit once it goes into effect, as some studies suggest that as many as one in five employees are bound by noncompete agreements.
Non-compete agreements typically prevent workers from changing employers within their industry for a set period of time. They are used in a wide range of industries, including technology, hairdressing, medicine, and even dance teaching, and affect both low- and high-wage workers.
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In April, the FTC voted 3-2 to ban the agreements, with the majority of commissioners arguing that research shows they depress wages, stifle entrepreneurship and clog the job market. Critics of the rule, including business groups like the U.S. Chamber of Commerce, have argued that the agreements are an important tool for protecting confidential information and investments in training.
The Chamber and other business groups sued to block the rule immediately after it was issued, arguing that the FTC lacked the authority to issue a regulation with such broad implications for the economy.
The Chamber then joined the case brought by Ryan LLC, a Dallas-based international tax consulting firm, which filed a lawsuit to block the rule in the Northern District of Texas on April 23, the day the FTC published its rule. The Business Roundtable, the Texas Association of Business and the Longview Chamber of Commerce also joined the case after it was initially filed.
“This decision is a major victory in the House’s fight against government micromanagement of corporate decisions,” Daryl Joseffer, the House’s chief counsel, said in a statement. “The FTC’s blanket ban on non-compete clauses is an illegal power grab that defies the agency’s constitutional and statutory authority and sets a dangerous precedent that government knows best than markets.”
The FTC said it is reviewing the decision and evaluating its next steps.
“The FTC is standing by its clear authority, supported by law and precedent, to issue this rule,” FTC spokesman Douglas Farrar said in a statement. “We will continue to fight to free hardworking Americans from illegal non-compete clauses that reduce innovation, stifle economic growth, trap workers, and undermine Americans’ economic freedom.”
In reaching her decision, Brown found that the plaintiffs “have a strong likelihood of succeeding on the merits” of their case, which argues that the FTC exceeded its statutory authority in issuing the rule. She also sided with the plaintiffs in concluding that the FTC’s issuance of the rule was unreasonable.
“The Commission’s lack of evidence as to why it chose to impose such a sweeping ban – which prohibits the conclusion or enforcement of virtually all non-compete clauses – instead of targeting specific, harmful non-compete clauses, makes the [rule] “arbitrary and capricious,” Brown writes.
