A federal judge in Texas has struck down the Federal Trade Commission's ("FTC") new rule banning non-compete agreements for workers, preventing the rule from going into effect on September 4.
In her opinion, Judge Ada Brown of the Northern District of Texas determined that the FTC has “some” authority to create rules preventing unfair methods of competition but the non-compete rule went beyond the authority given to the FTC by Congress.
The FTC issued the rule on April 23, 2024, with an effective date of September 4, 2024. The rule targeted contract provisions with an employer that prohibit a worker from, penalize a worker for, or function to prevent a worker from seeking or accepting work with a different business or person after the termination of employment or from operating a business after the termination of employment. The rule made it an “unfair method of competition” to enter into such a provision or to enforce such a provision, except that non-compete provisions entered before September 4, 2024, with a senior executive could be enforced.
Judge Brown examined the language of the FTC Act, as well as the history of the act, and found that Congress did not give the FTC the power to create the Non-Compete Rule. Furthermore, Judge Brown decided the rule was “unreasonably overbroad” and it did not have a rational connection to the goals of the FTC.
Judge Brown exercised her authority under the Administrative Procedures Act and struck the rule, concluding that the rule would ”not be enforced or otherwise take effect on its effective date of September 4, 2024, or thereafter.” Importantly, the court's decision strikes the rule on a nationwide basis.
Judge Brown's decision comes after a federal court in Pennsylvania rejected a challenge to the rule in ATS Tree Servs. LLC v. FTC (see our previous article Federal Judge Rejects Challenge to Noncompete Ban).
The rule eliminates, for now, the uncertainty that has paralyzed the creation of non-competition provisions affecting workers other than senior executives. In the absence of the rule, non-competition provisions, provisions limiting the right to solicit clients to a competing business, and other provisions that function as non-competition provisions, will again be governed by applicable state and local laws as opposed to the FTC's one-size-fits-all overreach.
The FTC will likely appeal to the 5th Circuit, but for now, the rule is invalid.
