Federal judge halts implementation of FTC's noncompete ban

A federal judge in Texas tossed the Federal Trade Commission's ban on noncompete agreements set for September, permitting employers, including mortgage companies, to potentially keep using them.

Judge Ada Brown of the U.S. District Court in Dallas sided with plaintiffs Tuesday, as she ruled that the FTC's ban on noncompetes violates the Administrative Procedure Act, exceeds the agency's statutory authority and should be "set aside."

"The Commission's lack of evidence as to why they chose to impose such a sweeping prohibition — that prohibits entering or enforcing virtually all noncompetes — instead of targeting specific, harmful noncompetes, renders the rule arbitrary and capricious," Brown wrote in a filing.

The decision arises from legal actions that the U.S. Chamber of Commerce and others immediately filed against the FTC after the agency published its rule in April. Opponents of the ban, including the Chamber, argued it was an illegal overreach that could harm competition.

Victoria Graham, an FTC spokesperson, said the agency is disappointed with the ruling and may appeal the decision.

"Today's decision does not prevent the FTC from addressing noncompetes through case-by-base enforcement actions," Graham added.

Peter Idziak, an attorney at Polunsky Beitel Green, thinks even if the agency does appeal, Judge Brown's ruling would be upheld.

"Instead of issuing a rule that targets specific, harmful noncompetes, the FTC's blanket ban is an abuse of the agency's discretion. I would expect Judge Brown's conclusion to be upheld by the Fifth Circuit if the FTC chooses to appeal," he said in a written statement Tuesday.

Around 30 million workers are subject to noncompetes, or close to 20% of the nation's workforce, the FTC estimates. Some of that workforce is part of the financial services industry.

Noncompetes are sometimes used in the mortgage industry to keep loan originators, executives and marketing personnel from jumping ship to competitors. They may also be used to protect information after an executive leaves a company, attorneys have said in previous interviews. 

Nonsolicitations, however, are far more prevalent in the mortgage industry.

Some have predicted that the new law would have created greater scrutiny over nonsolicitation clauses and set a higher burden for poaching lawsuits.

Under the FTC's final rule, employers would be prohibited from entering into or enforcing new noncompetes with senior executives, though existing ones would remain in place. Senior executives are defined as workers earning more than $151,164 annually and who are in policy-making positions.

The FTC, in pursuing a Biden administration goal, claimed the final rule will increase wages by almost $500 billion over the next decade, and increase individual earnings to $524 per year.