If the FTC rule goes into effect, it could affect up to millions of workers who are not within the scope of the lawsuit: Some studies suggest that as many as one in five employees are bound by non-compete agreements.
Non-compete agreements typically prohibit workers from changing employers within an industry for a certain period of time. They are used in a wide range of industries, including technology, hairstyling, healthcare and even dance instruction, and affect low- to high-wage workers alike.
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In April, the FTC voted 3-2 to ban the arrangements, with the majority of commissioners pointing to studies that show such deals suppress wages, stifle entrepreneurship and disrupt labor markets. Critics of the rule, including trade groups such as the U.S. Chamber of Commerce, argued that the arrangements are an important way to protect investments in proprietary information and training.
The Chamber of Commerce and other industry groups filed suit to block the rule shortly after it was issued, arguing that the FTC lacked the authority to promulgate regulations with such far-reaching effects on the economy.
The Chamber then joined a lawsuit filed by Ryan LLC, a Dallas-based global tax consulting firm, in the Northern District of Texas seeking to block the rule the day the FTC announced it on April 23. The Business Roundtable, the Texas Business Association and the Longview Chamber of Commerce also joined after the lawsuit was first filed.
“This ruling is a major victory for the Chamber in its fight against government micromanagement of business decisions,” Darryl Josepher, chief counsel for the Chamber, said in a statement. “The FTC’s blanket non-compete is an illegal power grab that ignores the agency’s constitutional and statutory authority and sets a dangerous precedent that the government knows better than the marketplace.”
The FTC said it was reviewing the decision and considering its next steps.
“The FTC is using its clear authority, supported by statute and case precedent, to issue this rule,” FTC spokesman Douglas Faller said in a statement. “We will continue to fight to free hardworking Americans from unlawful non-compete clauses that stifle innovation, stifle economic growth, trap workers, and undermine Americans’ economic freedom.”
In his decision, Judge Brown found that the plaintiffs’ lawsuit alleging that the FTC exceeded its statutory authority in issuing the rules was “substantially likely to succeed.” He also agreed with the plaintiffs, finding that the FTC’s issuance of the rules was unreasonable.
“The Commission lacks evidence as to why it chose to impose a blanket prohibition that would prohibit the entry or enforcement of virtually all non-compete clauses, rather than targeting specific harmful non-compete clauses. [rule] “It is arbitrary and capricious,” Brown wrote.
