A U.S. District Court judge in Texas on Tuesday blocked a Federal Trade Commission (FTC) rule banning noncompete agreements, which are commonly used in the mortgage and real estate industries.
Judge Ada E. Brown of the U.S. District Court for the Northern District of Texas granted plaintiff Ryan LLC, a tax services and software firm based in Dallas, its motion for summary judgment and denied the FTC’s cross-motion. Ryan LLC was joined by four plaintiff-intervenors: the U.S. Chamber of Commerce, Business Roundtable, Texas Association of Business and Longview Chamber of Commerce.
“The court sets aside the non-compete rule. Consequently, the rule shall not be enforced or otherwise take effect on its effective date of September 4, 2024, or thereafter,” Brown wrote in the decision. She delivered the opinion that “the FTC exceeded its statutory authority,” and that the rule is “arbitrary and capricious” and causes “irreparable harm.”
Victoria Graham, an FTC spokesperson, said in a written statement that the antitrust agency is “disappointed by Judge Brown’s decision and will keep fighting to stop noncompetes that restrict the economic liberty of hardworking Americans, hamper economic growth, limit innovation, and depress wages.”
“We are seriously considering a potential appeal, and today’s decision does not prevent the FTC from addressing noncompetes through case-by-case enforcement actions,” Graham added.
Brown had already blocked the rule temporarily in July. The decision is now permanent and nationwide in scope. It differs from last month’s decision in Pennsylvania, which stated that the FTC has clear authority to ban noncompete clauses.
In April, the FTC issued the noncompete ban, stating that it would protect the “freedom of workers to change jobs, increasing innovation, and fostering new business formation.” It followed President Joe Biden’s July 2021 executive order that urged the agency to address the issue.
FTC Chair Lina Khan said in a statement when the ban was put in place that noncompete agreements “keep wages low, suppress new ideas, and rob the American economy of dynamism.” She said more than “8,500 new startups would be created a year once noncompetes are banned.”
The FTC estimates that, through the ban, worker earnings would rise by $524 per year. The antitrust agency added that about 30 million people, or roughly one in five American workers, have noncompete agreements.
Brown said that states have historically regulated noncompetes — California is one example of a state that bans them — but the FTC began studying the topic in 2018. Congress, however, did not explicitly give the commission substantive rulemaking authority, and the judge ruled that it lacks statutory authority to retroactively invalidate millions of existing contracts
Companies using these agreements say they protect intellectual property and investments in training and professional development. In the mortgage and real estate industries, these contracts are usually signed by executives.
Peter Idziak, senior associate at mortgage law firm Polunsky Beitel Green, said that by banning all noncompetes, the FTC created an unreasonably overbroad prohibition that fails to rely on any evidence that they are an unfair method of competition.
“Instead of issuing a rule that targets specific, harmful non-competes, the FTC’s blanket ban is an abuse of the agency’s discretion. I would expect Judge Brown’s conclusion to be upheld by the Fifth Circuit if the FTC chooses to appeal,” Idziak said in a statement.