A federal judge in Texas struck down the Federal Trade Commission’s ban on noncompete agreements, ruling that the agency exceeded its authority with a proposal that would have voided contracts prohibiting workers from moving to rival employers.
In a 27-page opinion, U.S. District Judge Ada Brown said that the FTC lacked the statutory authority to issue the rule, which would have taken effect Sept. 4.
In her decision, Brown wrote that the “FTC’s promulgation of the Rule is an unlawful agency action.”
An estimated 30 million U.S. workers in a wide range of fields are subject to noncompete agreements.
Disputes over noncompete clauses in employment contracts restrict workers from taking jobs at rival companies.
The provisions are hardly new but there has been a proliferation of noncompete agreements in relatively low-wage work, raising questions over whether they are necessary for jobs that seemingly involve few trade secrets or even specialized training.
Academics point to a growing body of research that shows such contracts keep wages low and gum up labor markets.
A Labor Department study published in June 2022 estimated that 18 percent of Americans, or 1 in 5, are bound by noncompete agreements, but other research suggests it could be closer to 5o percent.
Evan Starr, a University of Maryland professor who co-authored the Labor Department study, says these agreements cause labor market “frictions” that can, among other things, suppress pay while imposing costs on firms wanting to hire.
The Federal Trade Commission, at the urging of President Joe Biden, proposed a nationwide ban on noncompetes, which it estimates would raise wages by nearly $300 billion a year.
The FTC in April voted 3-2 to issue the rule, with commissioners in the majority pointing to evidence that the agreements suppress wages, stifle entrepreneurship and gum up labor markets.
If it had gone into effect, the rule would have made it illegal for employers to include the agreements in employment contracts and would have invalidated existing clauses for most workers subject to them.
“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,” said FTC spokesperson Victoria Graham “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.”
Brown, who was appointed by President Donald Trump, hinted at her thinking last month, when she temporarily blocked the noncompete rule.
Brown wrote in her opinion Tuesday that, in addition to exceeding its authority, the FTC issued the rule based on “inconsistent and flawed empirical evidence,” while failing to consider evidence supporting noncompete clauses.
She also wrote that the agency failed to find alternatives to the rule it issued.
“The role of an administrative agency is to do as told by Congress, not to do what the agency thinks it should do,” Brown wrote.
Brown’s opinion stands in contrast to a Pennsylvania judge’s ruling last month that rejected a similar challenge.
In denying a Pennsylvania-based tree-care company’s bid for a preliminary injunction against the FTC rule, U.S. District Judge Kelley Brisbon Hodge, who was appointed by President Joe Biden, found that the FTC agency was well within its authority to issue it.
That means the issue is likely to be decided by US Supreme Court, which is stacked with ultra-conservative justices who have eagerly rolled back worker protections and freedom that had been won over the past hundred years.