The Federal Trade Commission’s (FTC) push to ban noncompete agreements hit a judicial wall after a federal judge ruled that the FTC overstepped its authority. Tax firm Ryan LLC introduced the lawsuit in April. The FTC can still appeal the ruling.
The FTC’s ban would have prevented for-profit employers from issuing new noncompete agreements while making existing noncompete agreements unenforceable after Sept. 4, 2024. The FTC voted 3-2 to approve the ban.
Noncompete clauses block people from working for a competing employer or starting a competing business after employment ends. FTC data shows that around one in five American workers is subject to noncompete clauses. Supporters of the ban say the clauses are an unfair restraint on competition that violates U.S. antitrust law and suppresses workers’ wages and mobility. According to legal documents, the FTC asserts it has the authority to establish a ban, “because non-compete clauses are ‘unfair methods of competition’ under Section 5 of the FTC Act.” Officials point to Section 6 of the Act, suggesting it grants the commission authority to issue the rule.
The construction and manufacturing industries have been noted for their reliance on noncompete contracts, as discussed in a U.S. Bureau of Labor Statistics survey. The survey found that 11% of construction and 18% of manufacturing workers had noncompete contract clauses. Sales (22%), management business (21%) and production (16%) rounded out the top three industries with the highest rates of noncompete clauses.
The FTC’s ban faced immediate backlash as companies reckoned with the possibility of workers swapping jobs freely and trade secrets falling into competitors’ hands. Multiple organizations, including the United States Chamber of Commerce and tax firm Ryan LLC, sounded the alarm and promptly sued.
“We prevail[ed] in protecting the very foundation of innovation that drives our economy from the overreach of the FTC in its misguided mission to invalidate millions of employment contracts,” says Ryan chairperson and CEO G. Brint Ryan, following the Court’s decision. “Non-competes serve as a cornerstone of mutual trust between employer and employee.”
According to court documents, Ryan officials argue that the ban would make it difficult for companies to retain talent. They write that the ban was “the product of an unconstitutional exercise in power, and the FTC’s acts, findings and conclusions were arbitrary and capricious.”
U.S. District Judge Ada Brown agreed, ruling that the FTC exceeded its authority.
“The Court concludes the FTC has some authority to promulgate rules to preclude unfair methods of competition,” Brown writes in her decision. “… However, after reviewing the text, structure and history of the Act, the Court concludes the FTC lacks the authority to create substantive rules through this method.”
The FTC’s establishment of the rule is an “unlawful agency action,” the Court ruled.
FTC officials disagree.
“We are 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,” says an FTC spokesperson.