On Tuesday, August 20, a federal judge in Texas shot down the Federal Trade Commission’s rule banning noncompete agreements (“the Rule”) that was set to take effect September 4. This means that the FTC cannot enforce the Rule. As a result, enforceable non-competes currently in place remain enforceable, and businesses and workers are free to enter into new non-competes (subject to applicable state law restrictions).
Earlier this summer, on June 3, the Court previewed its conclusion that the Rule was unlawful because the FTC exceeded its statutory authority in implementing the Rule, and that the Rule is arbitrary and capricious. But employers have been anxiously awaiting Tuesday’s ruling on the merits, uncertain about the future of non-competes.
On Tuesday, the Court affirmed its decision that the Rule is unlawful. The Court specifically held the FTC lacked the authority to create substantive rules regarding unfair methods of competition. The Court emphasized that agencies like the FTC are merely “creatures of Congress” and have “no power to act . . . unless and until Congress confers power upon [them].” In this situation, Congress did not empower the FTC to act to ban noncompetition agreements nationwide.
The Court also held that the FTC failed to justify the Rule’s nearly universal breadth. If it had gone into effect, the Rule would have retroactively invalidated over 30 million employment contracts and preempted the laws of 46 states. The Court described the Rule as “unreasonably overbroad without a reasonable explanation” because it imposed “a one-size-fits-all approach with no end date” and because the FTC failed to consider less disruptive alternatives. The Court ultimately found that the FTC’s lack of evidence as to why it chose to impose such a sweeping prohibition—that prohibits entering or enforcing virtually all non-competes—instead of targeting specific, harmful non-competes, rendered the Rule arbitrary and capricious. As a result, the Court found that the Rule was unlawful.
The FTC could appeal the ruling to the Fifth Circuit Court of Appeals. However, it is possible—if not likely—that the Fifth Circuit would agree with the Texas court and affirm the decision, as would the Supreme Court, if the FTC ever pursued the case to the nation’s highest court.
Even if the FTC abandons its effort to ban non-competes on a national level, states around the country will continue the assault. Several states have recently passed laws banning or restricting the use of non-competes, and others are likely to follow. Congress could get involved as well. A separate article discussing the fate of non-compete agreements is forthcoming. Stay tuned. But for now, rest assured that non-competition agreements are still permitted by federal law.
