On Tuesday, August 20, U.S. District Judge Ada Brown granted summary judgment in favor of striking down the Federal Trade Commission’s (“FTC”) rule banning noncompete agreements (the “Rule”). The Rule, which was set to take effect on September 4, would have prohibited employers from entering into noncompete agreements that prevent employees from working for another employer or starting a business. An FTC spokesperson indicated that the FTC is “seriously considering” an appeal to the Fifth Circuit.
In short, the decision states that the FTC:
- Has exceeded its legal powers and does not have the authority to issue substantive regulations. The Court criticized the FTC’s application of the FTC Act (the “Act”), emphasizing that Section 6(g) of the Act is intended as an “internal law” that establishes rules governing agency organization, procedures, or practices and does not grant the FTC the authority to issue substantive rules. The Court further emphasized that the Administrative Procedures Act (“APA”) does not grant the FTC the authority to issue substantive rules with respect to unfair competition practices.
- Legal penalties cannot be enforcedThe Court explained that there is no statutory penalty for violating regulations promulgated in the section that the FTC relied on in crafting the rule, supporting the Court’s conclusion that the section is not intended for substantive rulemaking.
- Creates a rule that is arbitrary and capricious within the framework of the APAThe Court reasoned that the rule was arbitrary and capricious because of its broad and general nature and because it was not based on sufficient evidence or consideration of less restrictive alternatives.
(View source.)
