As an update to our April 25, 2024 Client Alert, “FTC Issues New Rule—But Not the Final Chapter—on Non-Competes: What Employers Need to Know,” a federal court in Dallas, Texas has blocked the Federal Trade Commission’s Rule that sought to ban most employment non-competes in the United States. While an appeal by the FTC seems likely, for now the rule will not go into effect in September and businesses may continue to use non-compete agreements with employees consistent with current laws in their jurisdiction.
U.S. District Court Judge Ada Brown granted summary judgment yesterday in the case pending in the Northern District of Texas on the FTC’s Non-Compete Rule, and she correctly noted that largely “This is a dispute over the FTC’s rulemaking authority concerning the enforceability of employer/employee non-compete agreements.” Ryan, LLC v. Chamber of Commerce of the United States of America, et al., No. 3:24-CV-00986-E, at 4 (N.D. Tex. Aug. 20, 2024). “[T]he Court conclude[d] that Plaintiffs are entitled to summary judgment on all of their claims under the APA and Declaratory Judgment Act because the FTC exceeded its statutory authority in implementing the Rule, and the Rule is arbitrary and capricious.” Id. at 14. Judge Brown went on to explain that “By a plain reading, Section 6(g) of the Act does not expressly grant the Commission authority to promulgate substantive rules regarding unfair methods of competition. Next, Section 18 empowers the FTC to prescribe ‘interpretive rules and general statements of policy with respect to unfair or deceptive acts or practices in or affecting commerce.’ Section 18 limits the FTC’s ability to make rules dealing with unfair or deceptive practices—not unfair methods of competition.” Id. at 16-17 (internal citations omitted).
The FTC’s Rule contains requirements that employers tell current and former employees that their existing agreements are no longer enforceable, and that they do so in September. Lawsuits seeking to block the Rule, like the case decided yesterday, left employers wondering whether they would have to take steps to contact their current and former employees. But Judge Brown’s ruling is an outright ban on enforcement of the Rule and bars the provisions going forward.
Judge Brown issued her opinion ruling in favor of an accounting firm and a number of business groups, including the U.S. Chamber of Commerce. Building upon a prior ruling in the case that temporarily prohibited the Rule from being applied to the accounting firm, she held that FTC lacked authority to promulgate substantive rules on this issue; that the FTC exceeded its statutory authority in issuing the Non-Compete Rule; and that the Rule was arbitrary and capricious. The court rejected the FTC’s argument that the order should be limited only to the parties in the case, and Judge Brown instead ruled that the order had nationwide effect. Accordingly, the court set aside the Rule in its entirety and ordered that that Rule could not be enforced or take effect.
The FTC has stated that it is considering its options to appeal. An FTC spokesperson said the agency would continue to fight to stop noncompetes and that the FTC is “seriously considering a potential appeal” and that the decision “does not prevent the F.T.C. from addressing noncompetes through case-by-case enforcement actions.”
There are other federal challenges to the Rule pending in other federal courts, and the Texas decision differs from a prior federal court ruling in Pennsylvania which had declined to strike down the rule in that particular case. (See ATS Tree Services, LLC v. Federal Trade Commission, No. 2:2024-cv-1743, 2024 WL 3511630, at *19 (E.D. Pa. July 23, 2024) (denying injunctive relief and rejecting arguments that the FTC lacked substantive rulemaking authority for the Rule, that the FTC exceeded its authority, and that Congress unconstitutionally delegated legislative power to the FTC). Because of these conflicting decisions from district courts, appeals seem likely.
While the appeals process may take years, the ultimate fate of the Rule may depend on the outcome of the 2024 presidential election. If the Democratic ticket wins in November, we would expect the FTC to continue to pursue its appeal and, perhaps, to explore other rulemaking or enforcement options to restrict non-compete agreements. If the Republican ticket wins, it is less clear whether the FTC – which would then have a 3-2 Republican majority – would continue any appeal, or whether it would pursue any similar rulemaking or enforcement actions in the future.
In the meantime, businesses are entitled to rely on the Texas federal court decision, pending the results of any appeal. This means that businesses may continue to enter into and enforce non-compete agreements with employees, subject to current applicable state law. On that point, it is important to note that this decision does not affect current state law. Many states already impose significant limitations on non-compete agreements in the employment context, and a few states, such as California, ban them entirely.
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