Since it was announced in May 2024, the impending FTC ban on non-competes has been mired in controversy. The Rule, which was set to go into effect on September 4, 2024, was intended to ban nearly all non-competition agreements for employees across the country. As Sunstein previously wrote about, numerous lawsuit were immediately filed citing legal challenges to the Rule and the FTC’s rule-making authority. This week, on August 20, 2024, the Northern District of Texas officially ruled that the FTC ban is not enforceable.
The FTC Rule was set to ban employers from entering into non-competes with employees and void existing non-competes subject to limited exceptions, such as an exception for “senior executives,” defined as employees in a “policy-making position” who earn at least $151,164 per year. Though a handful of states already have restrictions on non-competes, the complete ban would retroactively invalidate millions of existing contracts nation-wide.
In Tuesday’s decision in Ryan v. Federal Trade Commission, Dallas District Court Judge Ada Brown struck down the FTC Rule, granting summary judgment in favor of the plaintiff and the US Chamber of Commerce, which had intervened in the case. The court held that: (1) the FTC lacked the statutory authority to enact the ban; and (2) the rule is arbitrary and capricious. This decision comes on the heels of an earlier July 3, 2024 decision in which the same judge granted a preliminary injunction staying the Rule’s September 4 effective date, but only with respect to the parties in the case.
In its ruling, the court looked at the text and structure of the FTC Act, ultimately holding that “the FTC lacks substantive rulemaking authority with respect to unfair methods of competition” and that “the Commission has exceeded its statutory authority in promulgating the Non-Compete Rule.” Further, the court concluded 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.’”
Judge Brown critiqued the FTC for relying on inconsistent and flawed empirical evidence to impose a wide-sweeping prohibition instead of targeting specific, harmful non-competes, as some states have done. The court reasoned that the FTC failed to adequately address alternatives.
The decision is one of the first important cases to issue following the Supreme Court’s decision in Loper Bright Enterprises v. Raimondo, in which the Court overturned a decades-old standard known as the Chevron doctrine that required courts to give substantial deference to agencies such as the FTC. It is no surprise that Judge Brown cited Loper Bright in her decision blocking the FTC Rule, noting that the Administrative Procedure Act should serve “as a check upon administrators whose zeal might otherwise have carried them to excesses not contemplated in legislation creating their offices.”
Significantly, the decision blocks the non-compete Rule for all employers across the country, not just the parties that had filed the Texas case. This decision puts to bed the uncertainty for employers on the brink of needing to comply with the Rule, and also moots other pending lawsuits. For example, an earlier decision in Pennsylvania denied a request to block the rule, while a Florida court recently issued a preliminary injunction.
Following the decision, the FTC has the option to appeal, but it faces an uphill battle. The first step would be the US 5th Circuit Court of Appeals, which is considered to be business-friendly and disfavors the current Administration’s policies related to federal regulatory power. A further appeal to the Supreme Court may similarly spell doom, as it recently took aim at such uses of regulatory rule-making and statutory interpretation in its Loper Bright decision.
For employers, this means that the status quo for its employment agreements will continue past September 4. It’s imperative for employers to keep track of state-specific restrictions on non-competes and to limit the use of non-competes to important employees, since the FTC still has the power (and motivation) to address non-competes through case-by-case enforcement actions.
