FTC's Ban on Noncompete Agreements Struck Down

“This means in essence that, unless a federal appeals court reverses Judge Brown’s decision—and we are admittedly only at the end of one phase of the likely three-phase judicial process as appeals are next—the FTC’s noncompete rule will not take effect on Sept. 4,"

A ruling by a federal judge in Texas striking down the Federal Trade Commission’s ban on noncompete agreements in the workplace has set the stage for a court battle that is likely to end up at the Supreme Court.

The ruling, handed down shortly before the FTC ban was slated to go into effect on Sept. 4, restores the status quo for noncompete clauses, with any current noncompete agreements remaining in effect.

U.S. District Judge Ada E. Brown of the Northern District of Texas ruled that the proposed ban on noncompete agreements is “arbitrary and capricious” and exceeds the FTC’s statutory rulemaking authority. Brown’s ruling bars enforcement of the FTC rule nationwide.

Brown issued her ruling in a suit by Ryan, a Dallas tax services provider, which sought to overturn the FTC ban on noncompete agreements.

Ryan is represented in the case by a Gibson, Dunn & Crutcher team led by Allyson Ho and Eugene Scalia, a former U.S. Secretary of Labor, along with lawyers from The Fillmore Law Firm in Fort Worth, Texas.

Other plaintiffs in that suit include Business Roundtable, Texas Association of Business and the Longview Chamber of Commerce, represented by Sullivan & Cromwell and Bradley Arant Boult Cummings. And a long list of parties has joined as amicus curiae, including the Partnership for New York City, represented by Davis Polk & Wardwell; the Society for Human Resource Management, represented by Seyfarth Shaw; and the American Hotel & Lodging Association, the Associated Builders and Contractors Inc., the Consumer Technology Association and others, represented by Epstein, Becker & Green.

Ryan Chairman and CEO G. Brint Ryan said his company had prevailed “in protecting the very foundation of innovation that drives our economy from the overreach of the FTC in its misguided mission to invalidate millions of employment contracts. Noncompetes serve as a cornerstone of mutual trust between employer and employee.”

FTC spokesperson Victoria Graham said in a statement, “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. We are seriously considering a potential appeal, and today’s decision does not prevent the FTC from addressing noncompetes through case-by-case enforcement actions.”

The FTC’s final rule barring noncompete agreements in almost all circumstances, which was issued in April, was promoted as a way to increase entrepreneurship and result in higher earnings for workers.

The Texas case is one of three challenging the FTC noncompete ban. In another such case, ATS Tree Services v. Federal Trade Commission, U.S. District Judge Kelley Brisbon Hodge of the Eastern District of Pennsylvania denied a motion to stay implementation of the noncompete ban in a suit by a tree-trimming company last month. And on Aug. 14, in Properties of the Villages v. Federal Trade Commission, U.S. District Judge Timothy J. Corrigan granted an injunction against enforcement that applied only to the plaintiff in the case.

Corrigan wrote that the FTC rule “cannot stand because it is subject to the major questions doctrine.” He added that “The major questions doctrine is the name recently given to a long-standing principle governing the interpretation of statutes conferring power on administrative agencies. The principle is this: when an agency claims to have the power to issue rules of extraordinary … economic and political significance, it must point to ‘clear congressional authorization’ for the power it claims.”

It’s no surprise that Brown came out against the FTC noncompete rule, but those watching the case were wondering if she would issue an injunction limited to the petitioning parties, as opposed to a broad, nationwide injunction, said Mark S. Goldstein, a labor and employment lawyer at Reed Smith in New York.

Brown’s latest ruling is “in contrast to her July 3 ruling that preliminarily enjoined the rule but only applied to the petitioning parties, not nationwide,” said Goldstein. “This means in essence that, unless a federal appeals court reverses Judge Brown’s decision—and we are admittedly only at the end of one phase of the likely three-phase judicial process, as appeals are next—the FTC’s noncompete rule will not take effect on Sept. 4.”

A narrow injunction from Brown “had the potential to cause some chaos between the preliminary junction decisions from Texas, Florida on the one hand and Pennsylvania on the other hand. So this allays that concern that the rule would potentially take an effect on Sept. 4 and later be struck down by the U.S. Supreme Court,” said Goldstein.

Based on the proceedings to date, he added, the challenge to the FTC noncompete ban in future proceedings in a court of appeals could go in any of several directions. He noted that the Texas judge found the FTC rules arbitrary and capricious, while the Florida judge said the rules violate the major questions doctrine.
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“So you have these two different theories playing out, and which one will will come up is yet to be seen,” he said.