United States District Court Judge Ada Brown of the Dallas district court issued an order and opinion on Tuesday that significantly impacts the Federal Trade Commission’s perceived scope of authority in its attempt to enforce a non-compete ban.
“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 stated.
Brown further denied the Federal Trade Commission’s (FTC) cross-motion for summary judgment.
On April 23, 2024, the Federal Trade Commission (FTC) issued a rule prohibiting the use of non-compete clauses nationwide. According to the FTC, this Rule was designed to safeguard workers’ right to switch jobs freely, promote innovation, and encourage the emergence of new businesses, The Dallas Express reported.
“Noncompete clauses keep wages low, suppress new ideas, and rob the American economy of dynamism, including from the more than 8,500 new startups that would be created a year once noncompetes are banned,” stated FTC Chair Lina M. Khan in a press release.
However, the Rule was strongly opposed.
“This decision sets a dangerous precedent for government micromanagement of business and can harm employers, workers, and our economy,” stated the U.S. Chamber of Commerce President and CEO Suzanne P. Clark.
The day after the FTC issued its new Rule, the Chamber of Commerce of the United States of America, Business Roundtable, Texas Association of Business, and Longview Chamber of Commerce filed a lawsuit against the FTC and its chair, Lina Khan.
“Noncompetes have never been regulated at the federal level,” the plaintiffs assert in the lawsuit, adding the “Noncompete Rule reflects an arbitrary and capricious exercise of the Commission’s powers.”
The Court’s decision on August 20, 2024, to “set aside” the non-compete Rule was influenced by several factors highlighted by Brown.
These factors included the absence of any state-level non-compete regulation as far-reaching as the FTC’s Rule, which the Court deemed was based on unreliable and flawed empirical data. Additionally, the Rule enforced a uniform approach without an expiration date, and evidence indicated that the FTC had not sufficiently considered alternative options before implementing the Rule.
“The Court concludes that the Rule is arbitrary and capricious because it is unreasonably overbroad without a reasonable explanation,” stated the judge’s memorandum opinion and order.
“In sum, the Court concludes that the FTC lacks statutory authority to promulgate the Non-Compete Rule, and that the Rule is arbitrary and capricious. Thus, the FTC’s promulgation of the Rule is an unlawful agency action,” the order continued.
U.S. Chamber of Commerce President and CEO Suzanne P. Clark issued a statement on August 20 celebrating its victory against the FTC’s non-compete ban.
“This decision is a significant win in the Chamber’s fight against government micromanagement of business decisions. A sweeping prohibition of noncompete agreements by the FTC was an unlawful extension of power that would have put American workers, businesses, and our economy at a competitive disadvantage. We remain committed to holding the FTC — and all agencies — accountable to the Rule of law, ensuring American workers and businesses can thrive,” read the press release.
