Background

In April, FTC voted 3-2 to approve a rule banning noncompete agreements. Under the rule, companies wouldn't be able to issue noncompete agreements and would be required to inform employees with existing noncompete agreements that they will not be enforced.

According to FTC Chair Lina Khan, noncompete agreements restrict workers' opportunities and infringe on their fundamental rights by preventing them from changing jobs.

"Robbing people of their economic liberty also robs them of all sorts of other freedoms, chilling speech, infringing on their religious practice, and impeding people's right to organize," Khan said.

FTC estimates that 18% of the American workforce, or around 30 million people, are covered by noncompete agreements. Currently, noncompete agreements are used in an estimated 40% of physician employment contracts and are used by many hospitals, health systems, physician groups, insurance companies, and pharmacy benefit managers.

According to FTC estimates, banning noncompetes would increase employees' earnings by up to $488 billion over the next decade and could lead to the creation of over 8,500 new businesses each year. The agency also noted that the rule could lower healthcare costs by up to $194 billion over the next decade.

Judge blocks noncompete ban

On Tuesday, U.S. District Judge Ada Brown blocked FTC's rule, saying the agency doesn't have the authority to ban what it deems unfair methods of competition by adopting broad rules.

"The Court concludes that the FTC lacks statutory authority to promulgate the Non-Compete Rule, and that the Rule is arbitrary and capricious. Thus, the FTC's promulgation of the Rule is an unlawful agency action," Brown wrote.

In July, Brown temporarily blocked the rule while she considered an attempt by the U.S. Chamber of Commerce, the largest business lobby in the United States, and the tax service firm Ryan LLC, to strike the rule down entirely.

In her ruling, Brown argued that even if FTC had the authority to adopt the rule, it didn't justify banning nearly all noncompete agreements.

"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 said.

Reaction

FTC spokesperson Victoria Graham said the agency was disappointed in the ruling and is "seriously considering a potential appeal," adding that the decision doesn't prevent the agency from addressing noncompetes on a case-by-case basis.

"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," Graham said.

The White House said the Biden administration still supports a noncompete ban.

"Special interests and big corporations worked together today to prevent nearly 30 million hardworking Americans from being able to get better jobs or start small businesses," said White House press secretary Karine Jean-Pierre in a statement. "The Biden-Harris Administration will keep fighting to empower workers to choose where they work, to start a business, and to get the pay they deserve, and continues to support the Federal Trade Commission's ban on noncompete agreements."

Meanwhile, Suzanne Clar, president and CEO of the Chamber of Commerce, said the decision was "a significant win in the Chamber's fight against government micromanagement of business decisions."

"A sweeping prohibition of noncompete agreements by the FTC was an unlawful extension of power that would have put American workers, businesses, and our economy at a competitive disadvantage," Clark said.

Similarly, John Smith, SVP, chief legal officer, and general counsel for Ryan, said the ruling "preserves the validity of millions of employment contracts across the nation that facilitate trust between employers and employees, innovation through the protection of IP, and investment in the training of employees."

Chad Golder, general counsel and secretary for the American Hospital Association (AHA), said that AHA was pleased with the ruling, adding that a ban on noncompetes would have a disruptive effect on hospitals and health systems. (Wiessner, Reuters, 8/20; Giorno, The Hill, 8/20; Hudson, Modern Healthcare, 8/20; Sahadi, CNN/Reuters, 8/20; Kaye, New York Times, 8/20)

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