Texas judge strikes down ban on non-compete agreements

A federal judge in Texas on Tuesday repeal the Federal Trade Commission’s (FTC) ban on non-compete agreements.

According to Reuters, U.S. District Judge Ada Brown in Dallas found that the FTC, which enforces federal antitrust law, does not have the authority to prohibit practices it deems unfair methods of competition by adopting broad rules.

Brown temporarily blocked the rule in July while she considered a bid from the U.S. Chamber of Commerce and tax firm Ryan to repeal it entirely. The rule was set to go into effect Sept. 4.

“This decision is a significant victory for the Chamber in the fight against government micromanagement of business decisions,” U.S. Chamber of Commerce President and CEO Suzanne P. Clark said in a statement on the Chamber’s website. “The FTC’s broad ban on noncompete agreements was an unlawful expansion of authority that would have put American workers, businesses, and our economy at a competitive disadvantage. We remain committed to holding the FTC — and all agencies — accountable to upholding the rule of law, ensuring that American workers and businesses can thrive.”

According to Reuters, Brown said in her ruling that even if the FTC had the authority to adopt the rule, it would not justify banning virtually all non-compete agreements.

“The Commission’s lack of evidence as to why it chose to impose such a sweeping ban … rather than focusing on specific, harmful anticompetitive provisions renders the rule arbitrary and capricious,” wrote Brown, a Republican appointee of former President Donald Trump.

FTC spokeswoman Victoria Graham said the agency was disappointed with the ruling and was “seriously considering a potential appeal,” Reuters reported.

“Today’s decision does not preclude the FTC from considering noncompete cases through individual enforcement actions,” Graham said in a statement.

In April, Federal Trade Commission Chairwoman Lina M. Khan told Lehigh Valley Business that the ban would give Americans the freedom to look for new jobs, start new businesses or bring new ideas to market.

“Non-compete clauses keep wages low, stifle new ideas, and rob the American economy of momentum, including the more than 8,500 new startups that would have been created in the year following a non-compete ban,” Khan said.

The Democratic-controlled FTC approved the ban on noncompete agreements in a 3-2 vote in May. The commission and supporters of the rule say the agreements are an unfair restriction of competition that violates U.S. antitrust law and limits wages and worker mobility, Reuters reported.

According to the FTC, about 30 million people, or 20% of U.S. workers, have signed non-compete agreements.

Jonathan Landesman, a partner in the Philadelphia office of Cohen Seglias and chair of the firm’s labor and employment practice group, told Lehigh Valley Business in April that the rule is the most drastic change to the law he has seen in 25 years of practicing employment litigation.

“The FTC’s final noncompete rule overturns centuries of common law precedent and retroactively and prospectively prohibits all noncompete agreements for all but a small subset of employees who qualify under the ‘senior executives’ exception,” Landesman said. “Business groups like the Chamber of Commerce are prepared to mount serious legal challenges to the FTC’s new rule, and it remains to be seen whether it will be declared invalid and unconstitutional before its effective date in 120 days.”

Last week, a federal judge in Florida ruled that the ban was likely invalid and blocked its application to the real estate developer. But a judge in Philadelphia went in a different direction in July, finding that the FTC had reasonably concluded that noncompete clauses are almost never justified.