A Texas federal judge has struck down the Federal Trade Commission’s rule broadly banning employers’ noncompete agreements 15 days before it was set to go into effect nationwide.
The ruling, handed down by U.S. District Judge Ada Brown on Tuesday afternoon, finds that the regulator had overstepped its statutory authority and that the ban was arbitrary and capricious. Last month the same judge had placed a partial block on the rule for the plaintiffs and plaintiff-intervenors, which included tax service firm Ryan and the U.S. Chamber of Commerce.
The final rule issued by the FTC in the spring would have forbid new noncompete agreements for all workers and phased out existing noncompetes for all but the most senior executives. Though the rule broadly applied to for-profit entities overseen by the agency, commissioners and the rule itself suggested that enforcement could have extended to some tax-exempt entities as well.
The FTC estimates that about one in five American workers, roughly 30 million people, are subject to noncompetes. The agency also predicted that its ban would increase worker wages by $400 billion to $488 billion over the next decade, or an average of $524 per person per year.
“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,” Victoria Graham, a spokesperson for the FTC, said in an emailed statement. “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.”
U.S. Chamber of Commerce President and CEO Suzanne Clark described the ruling as “a significant win” against government micromanagement of business.
"A sweeping prohibition of noncompete agreements by the FTC was an unlawful extension of power that would have put American workers, businesses, and our economy at a competitive disadvantage,” she said in a release. “We remain committed to holding the FTC—and all agencies—accountable to the rule of law, ensuring American workers and businesses can thrive."
Within healthcare, the FTC’s rule was lauded by labor groups and organizations representing healthcare workers, such as the American Nurses Association and the American Medical Association.
Employer groups, including the the American Hospital Association (AHA) and the Federation of American Hospitals (FAH), were staunchly opposed, pointing to the rule’s ambiguity regarding nonprofit enforcement and its potential to upend the industry.
“The rule was a breathtaking assertion of regulatory power by three unelected commissioners, made worse by the fact that the commissioners did not attempt to understand the disruptive impact it would have on hospitals, health systems and the patients they serve,” Chad Golder, general counsel and secretary for the AHA, told Fierce Healthcare in an emailed statement. “We are pleased that Judge Brown vindicated what the AHA predicted when this unlawful regulation was first released—the ‘only saving grace is that this rule will likely be short-lived, with courts almost certain to stop it before it can do damage to hospitals’ ability to care for their patients and communities.’”
"This rule would create an unlevel playing field for tax-paying hospitals, an outcome completely at odds with FTC’s mission to promote competition," FAH President and CEO Chip Kahn said in a statement. "Especially at a time of workforce shortages and other challenges, this was the right decision.”
Mixed district court rulings signal appellate review
In Tuesday’s ruling, Judge Brown underscored a disconnect between the FTC’s “one-size-fits-all” ban and its evidence against noncompetes. The agency, she wrote, cited studies on the economic effects of various state policies related to noncompetes, though none of these states had ever gone so far as the FTC’s near-total ban.
“The FTC’s evidence compares different states’ approaches to enforcing non-competes based on specific factual situations—completely inapposite to the Rule’s imposition of a categorical ban,” she wrote. “As to this latter point, the FTC provides no evidence or reasoned basis. The Commission’s lack of evidence as to why they chose to impose such a sweeping prohibition—that prohibits entering or enforcing virtually all non-competes—instead of targeting specific, harmful non-competes, renders the Rule arbitrary and capricious.
“In sum, the Rule is based on inconsistent and flawed empirical evidence, fails to consider the positive benefits of non-compete agreements, and disregards the substantial body of evidence supporting these agreements,” she wrote.
Brown, a Trump appointee, wasn’t the only judge considering the ban. In July a Pennsylvania federal court went a different direction and opted against enjoining the rule for plaintiffs, writing that the agency had the authority to promulgate its rule. However, just this past week a U.S. district court in Florida followed Brown’s initial example with a preliminary injunction for that case’s plaintiffs.
The district courts’ heterogeneous rulings likely pave the way for an appeal of Brown’s decision to strike the FTC’s ban.
Kevin Paule, an attorney with corporate litigation law firm Hill Ward Henderson whose practice focus includes noncompetes, told Fierce Healthcare “there is a possibility” that the issue passes through the appellate courts and reaches the U.S. Supreme Court. Based on its recent history, “the expectation is that the highest court in the land would side with Judge Brown’s ruling and prevent the implementation of the FTC’s rule,” he said.
Though such an outcome would restore the “status quo” of noncompete agreement governance falling under state law, he warned employers to be wary of shifting sentiment on the agreements.
“Over the past few years, the landscape has somewhat changed and state legislatures and courts have expressed skepticism regarding the use of non-compete agreements,” Paule said. “It is likely that additional states will pass laws that limit their use.
“Employers that rely on non-compete agreements no longer need to worry about the FTC’s Rule for the time being, but depending on where they operate, they should carefully review their agreements to ensure they’ll survive legal challenges in the future. One step that all employers should take is to include non-solicit and non-disclosure provisions in agreements, which are less susceptible to legal challenge.”