Getty Images | Kevin Dietsch
A US judge has ruled against the Federal Trade Commission in a challenge to its rule banning non-compete agreements, saying the FTC lacks “substantive” regulatory authority.
The preliminary ruling only blocks enforcement of the noncompete ban against the plaintiff and other groups that intervened in the case, but signals that the judge believes the FTC cannot enforce the rule. The case is in the U.S. District Court for the Northern District of Texas, so appeals will be heard in the U.S. Court of Appeals for the 5th Circuit — which is generally considered one of the most conservative appeals courts in place.
In April, the FTC issued a rule that would make the vast majority of current non-compete clauses unenforceable and prohibit future ones. The agency said non-compete clauses are “an unfair method of competition and therefore a violation of Section 5 of the FTC Act,” calling them “a widespread and often exploitative practice that imposes contractual terms that prevent workers from obtaining a job new or start a new business.”
A tax services firm called Ryan, LLC sued the FTC in an attempt to block the rule. The lawsuit was joined by the U.S. Chamber of Commerce, two Texas business groups and a lobbying association that represents CEOs at American businesses.
In a ruling Wednesday, U.S. District Judge Ada Brown granted a preliminary injunction and delayed the effective date of the rule as it applies to plaintiffs. The rule is scheduled to take effect on September 4, 2024. For now, the FTC’s non-compete ban is scheduled to apply to all but the entities involved in the lawsuit.
“FTC lacks essential rulemaking authority”
“The issue presented is whether the FTC’s ability to promulgate rules regarding unfair methods of competition includes the authority to create SUBSTANTIAL rules regarding unfair methods of competition,” wrote Brown, a Trump appointee.
Brown acknowledged that “the FTC has some authority to promulgate rules to exclude unfair methods of competition.” But “the text, structure, and history of the FTC Act reveal that the FTC lacks substantial rulemaking authority regarding unfair methods of competition under Section 6(g),” she wrote.
The FTC has argued that it can impose the rule using authority under sections 5 and 6(g) of the FTC Act. In addition to Section 5, Congress enacted Section 6(g) of the Act, in which it authorized the Commission to “make rules and regulations for the purpose of carrying out the provisions” of the FTC Act, which include the Act’s prohibition of unfair methods of competition. the FTC said when it issued the rule.
“The FTC stands by our clear authority, supported by statute and precedent, to issue this rule,” an FTC spokesperson told Ars today. “We will continue to fight to free working Americans from illegal non-competes that reduce innovation, stifle economic growth, lock out workers and undermine Americans’ economic freedom.”
The consumer advocacy group Public Knowledge called Brown’s decision “the latest in a series of attacks on the administrative state that only further emboldens judges without subject matter expertise to seize power from federal agencies and prevent them to effectively serve the American people.”
The Supreme Court last week overthrew the 40-year-old Chevron precedent, which gave agencies leeway to interpret ambiguous laws as long as the agency’s conclusion was reasonable. SCOTUS ruling gives courts more power to block federal rules.
The FTC cited only one “housekeeping statute”
Brown concluded that section 6(g) is merely a “housekeeping statute,” authorizing “rules of agency organization procedure or practice,” but not “substantive rules.”
“Plaintiffs next contend that the lack of a statutory penalty for violating the rules promulgated under section 6(g) demonstrates its lack of substantive rulemaking power. The Court agrees,” Brown wrote. “When authorizing legislative rulemaking, Congress also historically prescribes sanctions for violations of agency rules—confirming that those rules create substantial obligations for regulated parties.”
The judge said the plaintiffs would likely succeed on the merits and be harmed if the rule goes into effect. Brown intends to issue a decision on the merits by August 30.
The preliminary injunction does not apply across the board, as Brown chose to limit “the scope of the judgment here to Named Plaintiff Ryan, LLC and Palintiff-Intervenors The United States Chamber of Commerce; The Business Roundtable; The Association of of Texas Business; and the Longview Chamber of Commerce.”
Business trade groups wanted the order to apply to all of their member entities, but could not convince Brown to extend the order that far. “The Plaintiff-Intervenors have not directed the Court to either sufficient evidence of their respective members of the association to which they claim their right, nor any of the three elements that must be met with respect to companionship. Without a briefing of so developed, the Court declines to extend injunctive relief to the members of the Plaintiff-Intervenors,” Brown wrote.
