Key Takeaways

• A Texas district court judge has issued a summary judgment decision in Ryan, LLC v. Federal Trade Commission vacating the Federal Trade Commission’s (FTC) Noncompete Rule (Rule) nationwide. Unless and until an appeal is heard and decided, the Rule will not take effect on September 4.
• This decision follows the same court’s July 3 preliminary decision to block the Rule on employment-based noncompetes but, in that decision, only for the parties to the case. Now, after further briefing, the Northern District of Texas judge has held that the proper remedy is to vacate and annul the Rule nationally.
• The Texas district court held that the Rule exceeds the FTC’s authority and that the Rule was adopted in an arbitrary and capricious manner without a sufficient record. This decision on the FTC’s statutory authority and its rulemaking on noncompetes is contrary to an earlier preliminary ruling by the Eastern District of Pennsylvania in ATS Tree Services, LLC v. Federal Trade Commission. But because the Texas decision has nationwide impact, it annuls the Rule notwithstanding that earlier preliminary ruling.
• With this decision, the validity and enforceability of noncompetes remain issues of state law and federal antitrust laws, but the FTC retains the power to investigate and bring case-by-case proceedings against companies using noncompetes that the FTC finds constitute unfair competition.

What Happened?

Texas District Judge Ada Brown issued a decision on August 20 in response to competing motions for summary judgment filed by Ryan LLC, the U.S. Chamber of Commerce and the FTC in a case that challenged the FTC’s authority to issue its Noncompete Rule. Consistent with her preliminary ruling in early July, Judge Brown held that the FTC exceeded its statutory authority and acted in an arbitrary and capricious manner when it issued the Rule.

Now, however, unlike her prior, preliminary ruling — and in direct conflict with a decision issued by District Judge Kelley Hodge in the Eastern District of Pennsylvania — Judge Brown has blocked the Rule from going into effect nationwide as had been scheduled for September 4.

Next Steps

For now, no action is required by companies utilizing noncompetes. Prior policies and practices regarding the use of noncompetes can continue, subject as always to existing state laws (which differ from state to state) regarding the use of noncompetes.

This ruling does not affect the FTC’s authority to undertake investigations and enforcement actions against companies’ uses of noncompetes that the FTC finds constitute unfair competition — and such enforcement actions should be expected on a company-by-company basis.

Whether the FTC will appeal the Texas court ruling is at this point unknown, but it may do so, particularly given that Judge Hodge’s ruling in Pennsylvania supported the FTC’s noncompete rule — so stay tuned for further litigation updates.

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