The U.S. District Court for the Northern District of Texas issued its decision Tuesday that the business world had been awaiting with bated breath, striking down the Federal Trade Commission's (FTC) final rule making unlawful virtually all noncompete agreements. Unlike the preliminary injunction granted by the court last month, which was limited only to the parties, the court this week “set aside” the FTC rule, which now may not be enforced by the federal agency anywhere in the nation.
The Court’s Decision
The court found the FTC lacked the substantive rulemaking authority under Section 6(g) of the FTC Act to promulgate the rule prohibiting noncompetes. The court examined the FTC's historical and statutory authority and found no support for such authority. It further held that the noncompete rule was arbitrary and capricious, therefore violating the requirements of the Administrative Procedure Act (APA). The court criticized as capricious the “categorical ban” and “one-size-fits-all approach with no end date” based upon what it viewed as a "handful" of "inconsistent and flawed" economic studies that examined the effects of various state policies toward noncompetes. The court also criticized the FTC for not considering less disruptive alternatives.
What’s Next
The court rejected the FTC’s request that any relief be limited to the parties, as with the preliminary injunction, noting that “setting aside agency action . . . has ‘nationwide effect,’ is ‘not party-restricted,’ and ‘affects persons in all judicial districts equally.’”
The FTC has indicated that it is considering an appeal to the 5th U.S. Circuit Court of Appeals, so the legal battle may not be over yet. But the agency still has enforcement authority to pursue companies on a case-by-case basis if it believes a company’s use of noncompetes constitutes an unfair method of competition under Section 5 of the FTC Act. The FTC has used this authority a handful of times in the past few years.
Businesses should be mindful that even with the court’s decision, hostility toward noncompetes is here to stay. State legislatures are continuing to pass restrictions on the use of noncompetes, and there are some members of Congress who have indicated a desire to pass nationwide restrictions. Businesses should continue to review their use of noncompetes and other restrictive covenants to ensure that they comply with existing law and are narrowly tailored to increase the chance of enforcement.
Miles & Stockbridge’s labor and employment lawyers will continue to monitor the fate of the FTC’s noncompete rule as well as developments at the state level.
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