Federal judge in Texas invalidates the rule on a nationwide basis, concluding it exceeded the FTC's authority, just weeks before it was to take effect

In one of the most highly anticipated court rulings of the summer, on August 20, 2024, the U.S. District Court for the Northern District of Texas concluded that the FTC's Non-Compete Rule,[1] which makes most non-compete agreements unenforceable, (i) is in excess of the FTC's statutory authority; and (ii) is arbitrary and capricious. Holding that the Rule is "unlawful," the court invalidated the Rule on a nationwide basis under the Administrative Procedure Act. The court declared that the Rule, as unlawfully promulgated, "shall not be enforced or otherwise take effect on its effective date of September 4, 2024, or thereafter." The practical effect of this order is that employers do not need to publish notices to current or former employees that their non-compete agreements are unenforceable and that the usual state laws and judicial precedent continue to apply to all existing and future non-compete agreements.

In her 27-page opinion and order, Judge Ada E. Brown completely invalidated the Rule, which the FTC had approved along a 3-2 party-line vote. This order is, for now, the final decision concerning the Rule because it immediately and conclusively invalidates the Rule on a nationwide basis, despite a contrary ruling by the U.S. District Court for the Eastern District of Pennsylvania in ATS Tree Services, LLC v. FTC, et al., which on July 23 upheld the Rule. (See our previous coverage of the Rule and federal court actions in Texas and Pennsylvania.)

In pertinent part, Judge Brown noted that the FTC Act provided the commission with limited powers to prevent unfair methods of competition. Judge Brown found, however, that the commission's attempt to promulgate a nationwide one-size-fits-all Rule banning virtually all non-compete agreements (especially when the overwhelming majority of states allow them subject to common law reasonability requirements) fell beyond the statutory limitations imposed by Congress and that nothing in the legislative establishment of the FTC supported the implementation of such a far-reaching prohibition.

Relying heavily on the U.S. Supreme Court's recent decision in Loper Bright Enters. v. Raimondo,[2] Judge Brown found that the Administrative Procedure Act was enacted "as a check upon administrators whose zeal might otherwise have carried them to excesses not contemplated in legislation creating their offices." While the court acknowledged that "the FTC has some authority to promulgate rules to preclude unfair methods of competition" under the FTC Act, it "lacks the authority to create substantive rules" under the FTC Act. The court reasoned that federal administrative agencies are "creatures of Congress" with no power to act "unless and until Congress confers power upon it." Here, the court found, the FTC exceeded that power: "The role of an administrative agency is to do as told by Congress, not to do what the agency thinks it should do."

What's Next?

The FTC already has noted—and we fully expect—that it is considering all its options, including an appeal to the 5th Circuit. Although this decision provides relief to many employers across the country, we remind employers that non-compete provisions are still disfavored under certain state law and judicial precedent. Furthermore, this ruling may result in a renewed state legislative focus on narrowing or prohibiting non-compete provisions (including in New York state, which passed such legislation last year that was not signed by Governor Hochul). Accordingly, we continue to recommend that employers take measures to protect trade secrets and other sensitive data.