In a significant blow to the Federal Trade Commission (FTC), a US judge in Texas has ruled that the agency lacks "substantive" rulemaking authority in a challenge to its rule banning noncompete agreements. The ruling, issued by US District Judge Ada Brown, not only blocks enforcement of the noncompete ban against the plaintiff and other intervening groups, but also questions the FTC's ability to enforce the rule altogether.

The case, currently in the US District Court for the Northern District of Texas, may be appealed to the US Court of Appeals for the 5th Circuit, which is known for its conservative leanings. This ruling comes after the FTC issued a rule in April aiming to render the majority of existing noncompete clauses unenforceable and banning future ones.

The FTC argued that noncompete clauses are an unfair method of competition and a violation of Section 5 of the FTC Act, describing them as "a widespread and often exploitative practice" that restricts workers from pursuing new job opportunities or starting their own businesses.

The lawsuit against the FTC was filed by tax services firm Ryan, LLC, with support from the US Chamber of Commerce, two Texas business groups, and a lobbyist association representing CEOs of US businesses. Judge Brown granted a preliminary injunction and postponed the effective date of the rule specifically for the plaintiffs, with the rule set to take effect on September 4, 2024.

In her ruling, Judge Brown acknowledged that the FTC has some authority to promulgate rules to address unfair methods of competition. However, she concluded that the FTC lacks substantive rulemaking authority under Section 6(g) of the FTC Act, which authorizes the agency to create "rules and regulations."

The FTC has maintained that it has the necessary authority to impose the noncompete ban under sections 5 and 6(g) of the FTC Act. A spokesperson for the FTC reaffirmed the agency's position, stating that they will continue to fight against unlawful noncompetes that hinder innovation, economic growth, and workers' freedom.

Consumer advocacy group Public Knowledge criticized Judge Brown's ruling, viewing it as part of a wider trend of attacks on the administrative state. They argue that such actions undermine federal agencies' ability to effectively serve the American people.

This ruling comes shortly after the Supreme Court overturned the Chevron precedent, giving courts more power to challenge federal rules. This shift in power has the potential to impact the enforcement of regulations across various government agencies.

While the preliminary injunction granted by Judge Brown only applies to the named plaintiff and intervening groups, the ruling casts doubt on the FTC's ability to enforce the noncompete ban more broadly. Judge Brown is expected to issue a ruling on the merits of the case by August 30.

It remains to be seen how this ruling will shape the future of noncompete agreements and the FTC's authority over them. The outcome of any potential appeals and the subsequent legal developments will be closely watched by business entities, workers, and legal experts alike.