A US federal court in Texas set aside the Federal Trade Commission’s (FTC) new ban on non-compete clauses Tuesday, holding that the agency lacked the authority to issue the ban and that the new rule is “arbitrary and capricious.” The ban, which was set to go into effect on September 4, seeks to prevent employers from restricting where employees can work if an employee chooses to leave the company.
Judge Ada Brown of the Northern District of Texas ruled that the FTC Act, which gives the agency its authority, does not allow the FTC to make substantial rules, regulations that establish general obligations, “with respect to unfair methods of competition.” While Judge Brown acknowledged that Congress intended the FTC to craft rules to curb anticompetitive behavior, Brown held that this authority only extends to procedural rules, which address how the FTC handles unfair competition claims.
The court also ruled that the FTC ran afoul of the Administrative Procedures Act’s arbitrary-and-capricious standard, which requires courts to “hold unlawful and set aside agency action, findings and conclusions found to be … arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.” Brown held that the FTC’s rule was “unreasonably overbroad without a reasonable explanation.” The judge continued, “The Rule imposes a one-size-fits-all approach with no end date, which fails to establish a ‘rational connection between the facts found and the choice made.'”
Contrasting with Brown’s ruling, the FTC’s May 7, 2024 Federal Register entry claimed that:
Congress expressly “empowered and directed” the Commission to prevent unfair methods of competition throughout the economy,in any activities “in or affecting commerce,” subject only to limited exceptions. The final rule will apply only to the extent that the Commission has jurisdiction under the FTC Act. The Act does not limit the Commission’s authority to pursue, for example, industry-specific rulemaking. Where Congress wished to limit the scope of the Commission’s authority over particular entities or activities, it did so expressly, demonstrating its intent to give the Commission broad enforcement authority over activities in or affecting commerce outside the scope of the enumerated exceptions.
This latest blow to the FTC’s effort to curb anti-competitive employment practices comes just after another federal court in Florida temporarily blocked the ban from being enforced on a real estate broker who sued the FTC over its imposition. However, that court’s reasoning is distinct from Brown’s as it relied on the Major Questions Doctrine, a principle precluding agencies from issuing rules of “vast ‘economic and political significance,'” without Congressional authorization.
Previously, Brown blocked the ban pending a final opinion in July. However, a federal judge in Pennsylvania rejected a similar challenge to the FTC’s ban later that month.
