On August 20, 2024, the United States District Court for the Northern District of Texas issued a nationwide ruling blocking the implementation of the final Noncompete Rule (the “Final Rule”) announced by the U.S. Federal Trade Commission (“FTC”) in April 2024. Prior to the court’s ruling on August 20, it preliminarily blocked the FTC from implementing or enforcing the Final Rule, but only against the named plaintiffs in the lawsuit. As AGG previously discussed here, the court’s July 3, 2024, opinion suggested that the Final Rule would not survive judicial scrutiny.

Just 15 days shy of the effective date of the Final Rule, the court concluded in its August 20 opinion that:

(1) the FTC promulgated the Final Rule in excess of its statutory authority; and

(2) the Final Rule is arbitrary and capricious.

Importantly, the court’s opinion prohibits enforcement of the Final Rule nationwide, meaning that employers no longer need to prepare to comply with the Final Rule. The court’s reasoning is explained in more detail below.

The Court’s Opinion

1. The FTC Promulgated the Final Rule in Excess of its Statutory Authority

Starting with the language of Section 6(g) of the Federal Trade Commission Act (“FTC Act”), the court used a plain reading of the text to conclude that the Act did not expressly grant the FTC substantive rulemaking authority regarding unfair methods of competition. While the court acknowledged that Section 18 grants the FTC some rulemaking authority to preclude unfair methods of competition, it concluded that such authority does not include the ability to create substantive rules.

Analyzing the text, structure, and history of the FTC Act, the court further explained that the lack of a statutory penalty under Section 6(g) demonstrates the FTC’s lack of substantive rulemaking power. More specifically, the court concluded that, given the historical inclusion of sanctions for violations of agency rules that create substantive obligations, the lack of a penalty included within Section 6(g) indicates that the provision only anticipates “housekeeping rules.”

The court also reasoned that Section 6(g), the source of the FTC’s alleged rulemaking authority, is listed among a dozen entirely investigative powers. The court pointed out that, despite the FTC’s assertion that it had the authority to promulgate the Final Rule, it had failed to promulgate a single substantive rule under Section 6(g) for the first 48 years of its existence.

In sum, the court explained that “[t]he role of an administrative agency is to do as told by Congress, not to do what the agency thinks it should do.” Thus, the court concluded that the text and the structure of the FTC Act did not support a finding that the FTC had the statutory authority to promulgate substantive rules with respect to unfair methods of competition.

2. The Final Rule Is Arbitrary and Capricious

In addition to the court’s finding that the FTC lacked the authority to promulgate the Final Rule, the court also found that the Final Rule is arbitrary and capricious because it is unreasonably overbroad, without a reasonable explanation. In this regard, the court found a lack of evidence to support the Final Rule’s sweeping prohibition, as compared to, for example, a rule “targeting specific, harmful non-competes[.]” As such, the court found that “the Rule is based on inconsistent and flawed empirical evidence, fails to consider the positive benefits of non-compete agreements, and disregards the substantial body of evidence supporting these agreements.”

The court also criticized the FTC’s failure to sufficiently consider alternatives before issuing the Final Rule. In considering different courses of action, the FTC “was required to assess whether there were reliance interests, determine whether they were significant, and weigh any such interests against competing policy concerns.”  The court determined that, by failing to do so, the Final Rule did not fall within a zone of reasonableness, nor could it be reasonably explained.

Scope of Relief

Relying on Section 706(2) of the Administrative Procedures Act, the court set aside the Rule and held it unlawful. Following precedent set by the United States Court of Appeals for the Fifth Circuit, the court’s ruling has “nationwide effect,” is “not party-restricted,” and “affects persons in all judicial districts equally.” Braidwood Mgmt., Inc. v. Becerra, 104 F.4th 930, 951 (5th Cir. 2024). Accordingly, the Final Rule, which was scheduled to go into effect on September 4, 2024, is entirely blocked by the court’s order.

Key Takeaways

Although other courts have examined the Final Rule at the preliminary stage, such as the United States District Court for the Eastern District of Pennsylvania (which found that the FTC did have substantive rulemaking authority to promulgate the Final Rule), the Northern District of Texas is the first court to render a full judgment on the enforceability of the Final Rule. The FTC has indicated that it will likely appeal the court’s decision. It may also engage in efforts to address non-compete agreements through case-by-case administrative adjudication. While any further effort by the FTC to block non-competes on a nationwide basis is uncertain, employers should remain mindful of state and local efforts to restrict non-compete agreements, which are increasing. Employers should continue to ensure their non-compete agreements or other restrictive covenants comply with applicable state and local law.