On August 20, 2024, the U.S. District Court for the Northern District of Texas enjoined the Federal Trade Commission’s (FTC) proposed non-compete ban. The decision, issued by U.S. District Court Judge Ada E. Brown, sets aside the FTC’s Non-Compete Rule. So, the FTC cannot attempt to enforce the rule when it is scheduled to take effect on September 4, 2024.
The case is captioned as Ryan LLC (Plaintiff) and Chamber of Commerce of the United States of America, Business Roundtable, Texas Association of Business, and Longview Chamber of Commerce (Plaintiff-Intervenors) v. Federal Trade Commission, Civil Action No. 3:24-CV-00986-E.
Basis for Injunction
Judge Brown found two legal deficiencies in the promulgation of the FTC’s non-compete rule.
Exceeding Statutory Authority
The court found that the FTC exceeded its statutory authority under the Federal Trade Commission Act (FTC Act). The ruling emphasized that the FTC does not have the power to issue substantive rules that broadly prohibit non-compete agreements across all industries and employment levels. The FTC’s authority to prevent unfair methods of competition does not extend to the creation of sweeping, substantive regulations such as this Non-Compete Rule.
Arbitrary and Capricious Action
The court also determined that the FTC’s rule was arbitrary and capricious. The ruling criticized the FTC for imposing a one-size-fits-all ban on non-compete agreements without adequately considering less restrictive alternatives or providing a rational basis for the rule. Plus, the FTC’s reliance on certain studies was insufficient to justify such a broad prohibition. The judge noted that no state had enacted a rule as far-reaching as the FTC’s proposed regulation.
According to Judge Brown, “In sum, the Rule is based on inconsistent and flawed empirical evidence, fails to consider the positive benefits of non-compete agreements, and disregards the substantial body of evidence supporting these agreements.”
Status Quo Preserved
With the proposed non-compete ban blocked, employers may continue using non-competes to the extent allowed under applicable state law. Note that some states, such as California, already largely prohibit the enforcement of non-compete clauses.
While this ruling halts the FTC’s current efforts, it does not entirely close the door on federal regulation of non-competes. The FTC may attempt to appeal the decision (though the relevant appellate courts are not expected to reach a different conclusion). Alternatively, the FTC may revise its approach with a more limited non-compete ban. Some individual state legislatures will probably revisit potential non-compete bans as well.
For more employment law updates, sign up for the Horton Management Law email newsletter and follow us on LinkedIn.
