Judge Strikes Down FTC Noncompete Ban Nationwide

A Texas federal judge on Tuesday stuck down the Federal Trade Commission’s ban on noncompete agreements in employment contracts, holding that the ban violates the Administrative Procedure Act and exceeds the agency’s statutory authority.

The ruling, which applies nationwide, comes just 15 days before the ban was set to take effect on Sept. 4.

Judge Ada Brown of the U.S. District Court for the Northern District of Texas had already ruled against FTC last month, when she preliminarily enjoined the noncompete ban — but only with respect to the case’s plaintiffs.

Brown’s Aug. 20 decision, however, sets the regulation aside entirely, as the APA “does not contemplate party-specific relief,” she wrote.

The decision is a win for the U.S. Chamber of Commerce, the largest business lobby in the nation, which brought the suit along with a tax firm.

It’s more of a mixed bag for the healthcare industry. The noncompete ban was expected to help physicians, nurses and other medical workers locked into restrictive contracts by making it easier to change jobs and potentially cause wages to increase.

Roughly 35% to 45% of doctors are bound by noncompetes, according to the American Medical Association.

However, there were lingering questions about the ban, including whether the FTC had legal authority to promulgate it, whether it would apply to nonprofit hospitals and how it would affect M&A activity, physician shortages and recruitment efforts, especially for smaller regional systems.

Powerful hospital lobby the American Hospital Association, which strongly opposed the ban, cheered the judge’s decision.

“The rule was a breathtaking assertion of regulatory power … made worse by the fact that the Commissioners did not attempt to understand the disruptive impact it would have on hospitals, health systems, and the patients they serve,” AHA general counsel Chad Golder said in a statement shared with Healthcare Dive.

Meanwhile, the FTC is “seriously considering” an appeal, FTC spokesperson Victoria Graham said.

Graham noted that Brown’s decision does not stop regulators from going after overly restrictive noncompetes through case-by-case enforcement.

In April, the FTC voted 3-2 to approve the ban, which would have rendered all existing noncompetes unenforceable (except for some senior executives) while forbidding new contracts. Two Republican commissioners voted against the ban, arguing the FTC didn’t have congressional authority to enact it.

In Tuesday’s decision, Brown held that the Federal Trade Commission Act gives the FTC “some authority to promulgate rules to preclude unfair methods of competition” but that the agency “lacks the authority to create substantive rules” such as the noncompete ban.

This is supported by the fact that Congress did not prescribe sanctions for violations of certain FTC regulations, “which indicates a lack of substantive force,” she said.

Brown also concluded that the FTC’s ban is arbitrary and capricious within the meaning of the APA “because it is unreasonably overbroad without a reasonable explanation.”

The agency failed to offer evidence for its decision to prohibit all noncompete agreements instead of targeting specific, harmful agreements, the judge said.

Brown’s decision splits with that of a Pennsylvania federal judge who sided with FTC on July 23 and declined to block the ban. Last week, a Florida federal judge also issued a limited injunction of the ban, holding that FTC likely exceeded its statutory authority.

The contrasting rulings suggest the question of whether the FTC has authority to ban noncompete clauses could be subject to appellate review.