Federal Judge in Texas Puts Nationwide Block on FTC’s Noncompete Rule

A district court judge in Texas turned a temporary block on the Federal Trade Commission’s ban on noncompete agreements into a permanent halt in a ruling issued Tuesday, with the regulator now set to appeal to the U.S. 5th Circuit Court of Appeals.

The ruling puts a permanent, nationwide block on the ban on noncompetes passed by the FTC in April. The rule, one that FTC Chair Lina Khan and other members of the commission had fought for over the past year, was scheduled to go into effect on September 4.

U.S. District Judge Ada Brown issued a preliminary injunction on the ban in July and wrote that the plaintiffs in the case, Ryan LLC et al. v. Federal Trade Commission, were likely to be successful on the merits of the case.

Tuesday’s judgment in U.S. District Court for the Northern District of Texas reiterated that position, with Brown writing that the FTC’s rule is “an unlawful agency action” and that noncompete bans should be considered on a case-by-case basis.

“The Commission’s lack of evidence as to why they chose to impose such a sweeping prohibition … instead of targeting specific, harmful non-competes, renders the rule arbitrary and capricious,” Brown, appointed in 2019 by former President Donald Trump, wrote.

The FTC issued a statement that it is now “seriously considering a potential appeal,” also noting that “today’s decision does not prevent the FTC from addressing noncompetes through case-by-case enforcement actions.”

“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,” the regulator wrote.

The ruling counters a July ruling in the Eastern District of Pennsylvania by U.S. District Judge Kelley Brisbon Hodge, a 2022 appointee of President Joe Biden, that upheld the rule as lawful.

Business lobbying organization the U.S. Chamber of Commerce, a plaintiff in the suit, championed the ruling.

“This decision is a significant win in the Chamber’s fight against government micromanagement of business decisions,” said President and CEO Suzanne Clark in a statement.

Damian Cavaleri, a partner at Hoguet Newman Regal & Kenney LLP, which is not involved in the case, notes that an appeal by the FTC to the 5th Circuit is expected by legal experts to result in a circuit court split and, ultimately, an appeal to the U.S. Supreme Court.

“While the decision is expected to tee up a circuit split, it would be an interesting maneuver if the FTC declined to appeal the decision further, understanding that now may not be the right time to test this expanded authority before what is likely to be an unfriendly Supreme Court,” says Cavaleri via email.

Cavaleri notes that while the FTC has indicated it can continue to challenge noncompete agreements on a case-by-case basis, “it is unclear how successful those may be. Though such actions may ultimately result in further litigation, the narrower scope will allow the FTC to be more selective and find itself in friendlier courts.”