FTC exceeded its authority with noncompete ban, judge says

The Federal Trade Commission’s contention that it has authority under Section 6(g) of the FTC Act to ban noncompete agreements nationwide to curb unfair methods of competition is a misreading of its authority, Judge Ada Brown of federal district court in Texas ruled August 20, enjoining the agency from implementing the ban set to take effect September 4.

“The court concludes that the structure and the location of Section 6(g) show that Congress did not explicitly give the Commission substantive rulemaking authority under Section 6(g),” Brown said.

Although the provision allows the agency to issue rules, the rules are limited to procedural matters that help it investigate and take action against an organization it thinks is engaging in an unfair act or practice; it doesn’t authorize the agency to issue a substantive rule like the noncompete ban, she said.

“In sum, the court concludes that the text and structure of the FTC Act reveal the FTC lacks substantive rulemaking authority with respect to unfair methods of competition, under Section 6(g),” the judge says. “Thus … the court concludes the commission has exceeded its statutory authority in promulgating the noncompete rule.”

The decision is a blow to the agency’s effort to help workers move more freely between jobs. About one-fifth of the U.S. workforce is estimated to be subject to a noncompete, a practice that the agency says is restraining wages by preventing people from pursuing similar work with higher-paying employers or starting competing businesses.

“We are disappointed by Judge Brown’s decision and will keep fighting to stop noncompetes that restrict the economic liberty of hardworking Americans,” FTC spokesperson Victoria Graham said in a statement.

The agency can still go after companies on a case-by-case basis if it can show a company is using noncompetes as an unfair way to restrict competition. Last year, the agency entered into settlements with two of the largest glassmakers in the world requiring them to stop using noncompetes with their employees.

“Any legitimate objectives … could have been achieved through significantly less restrictive means,” the agency said when announcing the agreements.

The nationwide rule, were it to take effect, would be a more efficient way to curb the agreements, which companies have been aggressively expanding to include lower-level employees who don’t have access to the kind of trade secrets that the agreements have traditionally been used to protect.

The agency has called on companies to use other types of agreements to protect their interests. “Trade secret laws and non-disclosure agreements (NDAs) both provide employers with well-established means to protect proprietary and other sensitive information,” the agency said in April when it proposed the rule.

Ryan LLC, an accounting firm with a global practice, sued the FTC the day after it proposed its noncomplete rule. The U.S. Chamber of Commerce joined the lawsuit. Judge Brown issued a partial stay last month. Under this week’s ruling, the judge permanently enjoined the rule, preventing it from taking effect anywhere in the country.

In addition to finding the agency exceeded its authority, the judge found the rule to be arbitrary and capricious. None of the research the agency conducted was comprehensive enough to justify issuance of the rule. Nor did the agency consider other, less far-reaching ways to get at the problems it was trying to solve, Brown concluded.

“The commission’s lack of evidence as to why they chose to impose such a sweeping prohibition – that prohibits entering or enforcing virtually all noncompetes – instead of targeting specific, harmful noncompetes, renders the rule arbitrary and capricious,” she said.

Two other lawsuits against the rule are pending, one in Florida and one in Pennsylvania. The judge in Pennsylvania has issued a preliminary ruling in favor of the FTC and the judge in Florida in a preliminary ruling has come out against it.