FTC Noncompete Ban Freeze Signals Tough Legal Road for Agencies

A push by the Federal Trade Commission to broaden its regulatory powers was dealt a serious setback after a federal judge in Texas put on ice its rule banning noncompete provisions across the US.

Judge Ada Brown, of the U.S. District Court for the Northern District of Texas, on Wednesday sided with the U.S. Chamber of Commerce and a Texas tax firm’s argument that the FTC overstepped its legal authority with a sweeping regulation barring worker noncompetes.

The decision, on the heels of a set of Supreme Court decisions reining in agency power, demonstrates the challenge the FTC faces in pushing novel regulations dealing with competition in the economy.

“To the extent that the FTC leadership wanted to use ‘unfair methods of competition’ rulemaking as a tool, this suggests a tough road to continue down,” said Maureen Ohlhausen, a Wilson Sonsini partner and former FTC acting chair in the Trump administration.

The FTC’s noncompete rule, scheduled to go into effect Sept. 4r, was set to have transformative impacts across the economy. One in five workers in the US—roughly 30 million people—are subject to noncompete provisions, which generally prevent employees from moving jobs in the same industry for a particular period of time.

The rule is part of a greater push by FTC Chair Lina Khan to broaden antitrust regulation beyond price and efficiency into such areas as labor markets. But the ban faced fierce opposition from the Chamber, the nation’s largest business lobby, and other powerful trade groups.

The regulation, adopted in April in a 3-2 partisan vote, represented just the second time in the FTC’s 100-plus years of existence that it adopted a rule designed to confront unfair competition. Khan acknowledged that history in the proposal, noting the FTC has primarily pursued its antitrust mandates through targeted legal actions.

Still, she argued that competition rulemaking was within the FTC’s mandate and would be more beneficial in an area with the reach that noncompetes have. The states where such provisions are outlawed include California, Oklahoma, Minnesota, and North Dakota.

The FTC “stands by our clear authority, supported by statute and precedent, to issue this rule,” agency spokesman Douglas Farrar said in a statement Wednesday.

‘Rarely Tested’

Brown, a Trump appointee, ruled that the FTC Act creating the agency in 1914 doesn’t grant it the authority to create substantive rules on unfair competition.

The FTC’s short track record on regulations left the Khan-led agency with a big challenge, said Rebecca Haw Allensworth, a Vanderbilt University law professor.

The FTC has exercised its regulatory authority with respect to competition “so little that it’s rarely tested in the courts,” Allensworth said. “If you let that go for a long time, as chair Khan is now learning, it can be hard to flex that muscle in a way that passes constitutional muster.”

Brown’s ruling came just days after the Supreme Court in Loper Bright Enterprises v. Raimondo overturned a decades-old principle that allowed judges to defer to regulators’ interpretations of unclear laws.

The decisions together create more hurdles for any other regulation confronting “unfair competition” that the FTC might seek, said Ohlhausen.

“Chevron or the lack of Chevron “deference would be important for the FTC’s interpretation of what unfair methods of competition means,” she said. “Even if a court were to decide, yes, they do have this rulemaking authority, then the next step is saying noncompetes are consistent with the best-reading of unfair methods of competition.”

Brown’s ruling cited the June 28 Loper Bright decision and how it overturned a previous standard—known as Chevron deference—that courts once followed. While Brown’s decision didn’t turn on Loper Brightthat is expected to affect federal agencies across the board.

“Losing one of these cases might not be that big a deal to an agency like the FTC that seldom regulates,” said Eleanor Tyler, a Bloomberg Law antitrust analyst. “But the combination of these decisions together is brutally clear.”

Brown said she would fully brief the case and make a decision by Aug. 30, just days before the noncompete ban would go into effect. The injunction was only granted as it was applied to Ryan LLC—the Texas tax firm—the Chamber and other business group plaintiffs.

Any appeal would go to the Fifth Circuit, which has become a hotbed of legal challenges to Biden administration rules.

The case is Ryan LLC v. FTC, N.D. Tex., No. 3:24-cv-986, 7/3/24.