Fed Judge Blocks FTC Ban On Non-Competes

A federal judge in Texas on Tuesday struck down a landmark regulation issued by the Federal Trade Commission that sought to ban employers from using noncompete agreements to prevent most workers from joining rival firms.

The Wall Street Journal reports U.S. District Judge Ada Brown ruled that the commission’s authority to police unfair methods of competition couldn’t be used to issue substantive regulations that ban an entire category of conduct.

“The role of an administrative agency is to do as told by Congress, not to do what the agency thinks it should do,” Brown, a Trump appointee, wrote.

Lina Khan

The ban, issued in April, was part of FTC Chair Lina Khan’s effort to crack down on tactics that restrict the ability of workers to switch jobs. Outlawing noncompetes is hugely popular with many workers, and the FTC estimated its rule would have boosted earnings by allowing employees to move more freely between companies.

An FTC spokeswoman said the agency is weighing an appeal and would continue to “keep fighting to stop noncompetes that restrict the economic liberty of hardworking Americans, hamper economic growth, limit innovation, and depress wages.” 

Businesses that use noncompete agreements say they are an effective way to protect their intellectual property and other investments. Other measures, such as nondisclosure agreements, don’t protect companies as well, they say, because they must be litigated on a case-by-case basis to be enforced. 

The basis for regulating noncompete clauses comes from a 110-year-old law that prohibits unfair methods of competition, the FTC says. The agency first said in the 1960s that it could use that authority to write competition regulations. But it hadn’t issued a new competition rule for more than 50 years—until adopting the rule that Brown invalidated on Tuesday.

Brown wrote that Congress never granted substantive competition rule-making authority to the FTC. Lawmakers expressly authorized the FTC’s ability to regulate deceptive practices that mislead consumers, but they didn’t want the agency to regulate how firms compete, she wrote. The FTC misused what she called a “housekeeping statute,” aimed at organizing its internal functions, to create a basis for a sweeping assault on labor agreements.