Federal District Court Freezes FTC’s Noncompete Ban
A federal judge sided with the U.S. Chamber of Commerce and a Texas tax firm’s argument that the Federal Trade Commission overstepped its authority by banning noncompete agreements nationwide. The court issued a preliminary injunction on July 3 preventing the rule from taking effect on Sept. 4 while the court considers the merits. The court intends to issue an ultimate ruling on the legality of the FTC’s ban by Aug. 30. The ruling only blocks the ban for the businesses and jurisdiction involved in the litigation, but it could leave the future of the nationwide ban uncertain.
As explained in a prior alert, the FTC’s ban targets provisions in employment agreements that restrict where employees can work after their employment ends with an employer (more commonly referred to as noncompete provisions or noncompetes). In April 2024, the FTC voted 3-2 along party lines to implement the new rule. The rule deems noncompete provisions in employment an unfair method of competition, thus rendering such provisions invalid and unenforceable. Not only does the rule ban noncompetes, it also requires employers to advise current and former employees that existing noncompetes are no longer enforceable.
Of course, these restrictions and requirements only have force if the rule goes into effect. In preliminarily enjoining the FTC’s rule, the court explained that “the text and the structure of the FTC Act reveal the FTC lacks substantive rulemaking authority with respect to unfair methods of competition.” The court concluded that the FTC’s ban exceeded the FTC’s “statutory authority in promulgating the noncompete rule, and thus plaintiffs are likely to succeed on the merits” of their claim, which seeks to declare the rule invalid.
The decision calls into question the viability of the FTC’s noncompete ban going forward. The preliminary injunction is limited to the specific plaintiffs in that litigation and the court’s limited jurisdiction. However, the court held that the FTC does not have authority to implement substantive rules on the issue of unfair competition, and that even if the FTC did have such authority, it was carried out in an arbitrary and capricious manner with respect to the noncompete ban. The court’s focus on the FTC’s limited rulemaking authority and overall process enacting the ban is highly indicative of the court’s leanings and suggests how the court may ultimately rule on the merits.
Notably, the preliminary injunction follows the Supreme Court’s recent decisions limiting agency power, including the recent Loper Bright decision overturning the Chevron doctrine (i.e., “Chevron deference”). The preliminary injunction and recent Supreme Court decisions demonstrate the challenges the FTC faces advancing new regulations, especially those addressing competition in the economy.
Additionally, a separate challenge to the noncompete ban is pending in the Eastern District of Pennsylvania. In the Pennsylvania litigation, ATS Tree Services is seeking a similar injunction against the FTC’s ban. The court in that case is set to hear the injunction on July 10, and a decision is expected by July 23.
Phelps will continue monitoring this situation and report further as more developments occur. Please contact Jason Pill or any member of the Labor and Employment team if you have any questions or need advice on this issue.
