Texas federal judge Ada Brown permanently blocked the Federal Trade Commission’s (“FTC”)  ban on noncompete agreements in employment contracts, setting aside the regulation with a conclusion that it’s beyond the agency’s authority.

A copy of Judge Brown’s Opinion is attached to my LinkedIn post.

So, let’s discuss how Judge Brown reached her conclusion of block the FTC’s ban.

1️⃣ The FTC Exceeded Its Authority

Judge Brown found that the FTC improperly exceeded its statutory authority by creating a new rule banning noncompetes based on the FTC Act’s “housekeeping rules” that lack statutory penalties, as opposed to the statute’s “substantive rulemaking power” provisions.

“In sum, the Court concludes that the FTC lacks statutory authority to promulgate the Non-Compete Rule, and that the Rule is arbitrary and capricious. Thus, the FTC’s promulgation of the Rule is an unlawful agency action,” Judge Brown said.

Judge Brown acknowledged that Congress vested the commission with the power to prevent unfair methods of competition, but she concluded that the “plain reading” of Section 6(g) of the FTC Act, which the rule was created under, doesn’t give the commission the authority to create “substantive rules regarding unfair methods of competition.”

2️⃣ The Rule Is Arbitrary And Capricious

She additionally concluded that the “sweeping” rule is an arbitrary and capricious “categorical ban” that violates the Administrative Procedure Act due to its “one-size-fits-all approach with no end date.” The judge also held that the FTC created it based on only a “handful” of “inconsistent and flawed” economic studies that examined the effects of various state policies toward noncompetes and without considering less disruptive alternatives.

“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,” the opinion says.

3️⃣ Now What❓

Employers do not have to comply with the FTC Rule. However, the tussle over the validity of non-compete agreements isn’t over yet.

Keep in mind, the National Labor Relations Board’s General Counsel continues to take the position that non-competition agreements violate the National Labor Relations Act.

Also, the FTC will undoubtedly appeal this decision, and it has already come out and said that it has the authority to police non-compete agreements on a case-by-case basis.

For now, employers should enjoy the win, but it’s not a license to go wild with non-competition agreements.