A recent ruling by a US judge in a challenge against the Federal Trade Commission (FTC) regarding its ban on noncompete agreements revealed that the FTC lacks substantive rulemaking authority. The judge issued a preliminary injunction against the enforcement of the noncompete ban only for the plaintiff and other intervenors in the case. This ruling implies that the judge believes the FTC does not have the power to enforce the rule.
The FTC issued a rule in April aiming to make current noncompete clauses unenforceable and ban future ones, citing them as unfair methods of competition. The rule was met with opposition from various groups, including a tax services firm and business associations, leading to the lawsuit against the FTC.
US District Judge Ada Brown, a Trump appointee, granted a preliminary injunction and postponed the rule’s effective date for the plaintiffs. She argued that while the FTC has some authority to create rules against unfair competition, it lacks substantive rulemaking power under Section 6(g) of the FTC Act. The FTC, however, maintains that it has the statutory and precedent support to issue the rule and is committed to fighting against unlawful noncompetes.
Brown’s ruling has been criticized by consumer advocacy groups as an attack on the administrative state, giving judges more power to block federal rules. The recent overturning of the Chevron precedent by the Supreme Court has further empowered courts in this regard.
The judge’s decision was based on the interpretation of Section 6(g) as a “housekeeping statute,” which does not authorize the creation of substantive rules. She highlighted the absence of statutory penalties for violating rules under this section, indicating a lack of substantive rulemaking power. Brown indicated that the plaintiffs are likely to succeed on the merits and would be harmed if the rule is enforced, with a final ruling expected by August 30.
While the preliminary injunction does not apply nationwide, it only extends to the named plaintiffs and intervenors in the case. The business trade groups sought broader relief for all their member entities, but the judge declined to extend the injunction without sufficient evidence of their standing. This decision has implications for the future enforcement of noncompete agreements and the FTC’s regulatory authority in addressing unfair competition practices.
