On August 20, U.S. District Judge Ada Brown for the Northern District of Texas ruled that the Federal Trade Commission's (FTC) claim of authority under Section 6(g) of the FTC Act to ban non-compete agreements nationwide to curb unfair methods of competition was a misreading of its powers. The ruling prevents the FTC from implementing the non-compete ban originally scheduled to take effect on September 4.

Judge Brown stated: "The Court concludes that the structure and placement of Section 6(g) indicate that Congress did not expressly grant the Commission substantive rulemaking authority under that provision."

Although the provision allows the Commission to issue rules, Brown noted that these rules are limited to procedural matters, designed to assist it in investigating and taking action against organizations engaged in unfair acts or practices; it does not authorize the Commission to issue substantive rules like the non-compete ban.

In her ruling, the judge wrote: "In sum, the Court concludes that the text and structure of the FTC Act indicate that the FTC lacks authority to create substantive rules regarding unfair methods of competition under Section 6(g). Therefore... the Commission exceeded its statutory authority in promulgating the non-compete rule."

This decision is a blow to the FTC's efforts to help workers move more freely between jobs. It is estimated that about one-fifth of the U.S. workforce is bound by non-compete agreements. The FTC has said that such practices suppress wages by preventing people from seeking better-paying similar jobs or starting competing businesses.

FTC spokesperson Victoria Graham said in a statement: "We are disappointed with Judge Brown's decision and will continue to work to stop non-compete agreements that restrict the economic freedom of hardworking Americans."

If the FTC can prove that a company uses non-compete agreements as a means of unfairly restricting competition, it can still hold that company accountable on a case-by-case basis. Last year, the agency reached settlements with two of the world's largest glass manufacturers, requiring them to stop using non-compete agreements with employees.

When announcing those agreements, the agency said: "Any legitimate goal... could have been achieved through significantly less restrictive means."

This nationwide rule, if it had taken effect, would have been a more effective way to curb such agreements. In recent years, companies have been aggressively expanding the scope of non-compete agreements, extending them to lower-level employees who do not have access to the trade secrets traditionally protected by such agreements.

The FTC has called on businesses to use other types of agreements to protect their interests. When proposing the rule in April, the agency said: "Trade secret law and non-disclosure agreements (NDAs) both provide employers with well-established means to protect proprietary and other sensitive information."

Global accounting firm Ryan LLC sued the FTC the day after it proposed the non-compete rule. The U.S. Chamber of Commerce also joined the lawsuit. Judge Brown issued a partial stay last month. With this week's ruling, the judge permanently enjoined the rule, preventing it from taking effect anywhere in the country.

In addition to finding that the agency exceeded its authority, the judge also found the rule to be arbitrary and capricious. Brown argued that the studies conducted by the agency were insufficient to justify the rule, and that the agency did not consider less impactful alternatives to address the problems it sought to solve.

She said: "The Commission lacked evidence to explain why it chose to implement such a comprehensive ban—prohibiting the creation or enforcement of nearly all non-compete agreements—rather than targeting specifically harmful non-competes, making the rule arbitrary and capricious."

Two other lawsuits against the rule are still pending, in Florida and Pennsylvania. A Pennsylvania judge sided with the FTC in a preliminary ruling, while a Florida judge ruled against the rule in a preliminary decision.

The FTC said it is considering its options. Graham said: "We are seriously considering a potential appeal."