In a major setback for the Biden administration’s efforts to limit the use of non-compete clauses and agreements, a federal judge in Texas has struck down a rule from the Federal Trade Commission (FTC) that would have banned this practice nationwide.
On Tuesday, a report from Reuters indicated that US District Judge Ada Brown sided with the United States Chamber of Commerce and other plaintiffs and supported a motion that effectively prevented the FTC from enforcing this rule.
The agency’s non-compete ban should have taken effect on September 4th but its future is now uncertain as Brown blocked the measure in court.
In her ruling, Judge Brown concluded that the FTC had “exceeded its statutory authority” when it enacted this prohibition on non-compete agreements. She also qualified the rule as “arbitrary and capricious” and stated that the agency failed to adequately justify such a “broad” ban. “(The rule) is hereby SET ASIDE and shall not be enforced or otherwise take effect on September 4, 2024, or thereafter,” Brown decisively ruled.
However, some legal experts have argued that her ruling has little if any backing in precedent or law and that it is likely to be overturned on appeal (eventually).
This would fit in the recent trend of southern judges (mostly in the 5th circuit) dismissing law and precedent to make bombastic pro-corporate and pro-GOP rulings, even though they are often overturned on appeal. Some have argued that the motivation behind many of these overreaches is to make waves in GOP circles, hoping for a spot on the Supreme Court if Donald Trump wins the 2024 election.
US Chamber of Commerce Celebrates the Decision
The decision could be a significant victory for some kinds of businesses if it isn’t overturned. The Chamber of Commerce is just one among the many industry groups that have fiercely opposed the FTC’s crackdown on non-competes. Companies argue that these contractual clauses are necessary to protect trade secrets, customer relationships, and investments in training employees.
“This decision is a significant win in the Chamber’s fight against government micromanagement of business decisions,” said Suzanne Clark, President and CEO of the U.S. Chamber of Commerce.
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“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.”
However, the ruling was met with disappointment from the Biden administration as the latter has made banning non-competes a key part of its pro-worker agenda.
“Special interests and big corporations worked together today to prevent nearly 30 million hardworking Americans from being able to get better jobs or start small businesses,” said White House Press Secretary Karine Jean-Pierre.
“The Biden-Harris Administration will keep fighting to empower workers to choose where they work, to start a business, and to get the pay they deserve, and continues to support the Federal Trade Commission’s ban on noncompete agreements.”
The FTC also expressed its displeasure with the court’s decision and stated that it is “seriously considering a potential appeal.”
However, legal experts caution that the agency may face an uphill battle, given the 5th Circuit Court of Appeals’ reputation as an overtly business-friendly court.
“(A)ny appeal would be heard by the notoriously business-friendly 5th Circuit Court of Appeals (in Texas), where the odds of the rule being resurrected are slim. And the next step after that would be a potential visit to the Supreme Court, which has taken direct aim at the regulatory state in recent years and is likely a hostile environment for any attempt by the FTC to wield such power,” attorneys from the law firm Fisher Phillips highlighted.
Scope and Rationale of the FTC’s Non-Compete Ban
In April 2024, the FTC voted 3-2 along party lines to approve a nationwide ban on non-compete agreements. The rule would have prohibited these clauses for all workers with a narrow exception for certain senior executives.
The FTC argued that non-competes are an “unfair method of competition” that violates antitrust laws by suppressing wages, limiting workers’ mobility, and stifling innovation. The agency said it had heard from thousands of workers who had been harmed by these restrictive covenants. It’s also important to note that noncompetes don’t just affect executives and business owners. Some companies like Jimmy John’s required their entry level workers to sign noncompete clauses, likely only to make sure that they don’t find a better paying job from a competitor. It’s hard to imagine that sandwich makers at Jimmy John’s need to be bound by these agreements for any other legitimate reason.
“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 non-competes are banned,” FTC Chair Lina Khan said at the time.
The FTC estimated that banning non-competes could result in higher earnings for workers, with the average employee seeing an additional $524 per year.
However, the two Republican commissioners on the FTC dissented, arguing that the agency lacked the legal authority to enact such a broad rule. They contended that any changes to non-compete laws should be made by Congress, not the FTC.
Despite the Judge’s move to block the rule, the FTC can still pursue individual bans on a case-by-case basis as part of its enforcement actions.
The Implications for the FTC and the Biden Administration
The federal court’s decision to block the FTC’s non-compete ban likely represents a significant setback for the Biden administration’s efforts to empower workers and promote competition.
President Biden has made curbing the use of non-competes a key element of his pro-labor agenda and the FTC’s proposed rule was seen as a major step toward to fulfill that goal. With the rule now effectively nullified, at least for the time being, the administration will likely have to explore other avenues to restrict these contractual clauses.
The FTC intentions to appeal the court’s ruling may not just face significant opposition within the 5th Circuit Court of Appeals but it may also result in a lengthy legal battle. Just months before a presidential election takes place in the country, the incentives to pursue an appeal may be diminished.
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A new President could propose a new FTC Chairman or could pressure the agency to drop its intention to enforce the ban altogether. This may certainly be the case if Trump wins.
Even if the FTC ultimately prevails on appeal, the time that it will ultimately take to achieve that goal means that the non-compete ban will not be taking effect anytime soon.
The setback may also embolden business groups to challenge other Biden administration initiatives targeting anti-competitive practices. The US Chamber of Commerce, for instance, has already sued the FTC over its proposed rule banning “junk fees” in the hospitality industry.
Overall, the federal court’s ruling represents a significant victory for the business community and a blow to the Biden administration’s efforts to reshape the U.S. labor market. While the fight over non-competes may not be over, the next administration may not give this matter the same level of priority or may have contrarian views about it.