Employers nationwide have for months grappled with how to address the FTC’s April 23, 2024 rule prohibiting post-termination non-competition agreements in employment contracts (“FTC Rule”). On Tuesday, August 20, the United States District Court for the Northern District of Texas provided employers some breathing room—for now—when it found the FTC Rule unlawful and could not go into effect as planned on September 4. 

The court invalidated the FTC Rule on two grounds: (1) the FTC exceeded its authority when it implemented the Rule, and (2) the Rule is arbitrary and capricious. 

Finding the FTC lacked authority to implement the Rule, the court wrote: 

Plainly read, the Court concludes the FTC has some authority to promulgate rules to preclude unfair methods of competition. Indeed, the Act alludes to this power in Section 18. See 15 U.S.C. § 57a. However, after reviewing the text, structure, and history of the Act, the Court concludes the FTC lacks the authority to create substantive rules through this method. Section 6(g) is “indeed a ‘housekeeping statute,’ authorizing what the APA terms ‘rules of agency organization procedure or practice’ as opposed to ‘substantive rules.’” Chrysler Corp. v. Brown, 441 U.S. 281, 310, 99 S. Ct. 1705, 1722, 60 L. Ed. 2d 208 (1979).

Determining the FTC Rule is arbitrary and capricious, the court wrote: 

Because the FTC is an administrative agency, the Court may analyze the Commission’s actions under the APA’s arbitrary-and-capricious standard. See 5 U.S.C. § 706(2)(A). The Court concludes that the Rule is arbitrary and capricious because it is unreasonably overbroad without a reasonable explanation. The Rule imposes a one-size-fits-all approach with no end date, which fails to establish a “rational connection between the facts found and the choice made.” State Farm, 463 U.S. at 43, 103 S. Ct. at 2867 (quoting Burlington Truck Lines, Inc. v. United States, 371 U.S. 156, 168, 83 S. Ct. 239, 246, 9 L. Ed. 2d 207 (1962)).

On these grounds, the court granted summary judgment for the FTC Rule’s challengers, and set aside the Rule, expressly stating it will not go into effect on September 4. The FTC stated through a spokesperson that it is “seriously considering” an appeal. 

For now, employers with lawful non-compete agreements are not required to take immediate action. But all employers should continue to monitor developments regarding non-compete agreements both on the state and national level.