On August 20, 2024, a federal court in Texas struck down the Federal Trade Commission’s new Rule generally prohibiting most employment-based non-compete agreements. The new Rule was invalidated and set aside, meaning it will not go into effect on September 4, 2024, as planned.
As explained in our April 26, 2024, Client Alert, the Federal Trade Commission issued an administrative Rule generally prohibiting most employment-based non-compete agreements. This brought about numerous lawsuits challenging the FTC’s ability to issue the non-compete ban. The first decision was issued on July 3. As noted in our July 10, 2024 Client Alert, the Texas court issued a preliminary injunction blocking the new Rule, but the injunction only applied to the parties involved in that case. However, the judge in that case promised a final decision on the merits prior to the September 4, 2024, effective date.
On August 20, 2024, Judge Ada Brown of the Northern District of Texas in the case Ryan, LLC v. Financial Trade Commission rendered that decision. Judge Brown found the FTC Act does not empower the FTC to issue “substantive” rules like the non-compete rule, and therefore the agency exceeded its statutory authority. The Court found the rule also violates the Administrative Procedure Act because it was arbitrary and capricious. The Court stated, “[I]t 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.’”
The Court also found the record before the FTC did not support the rule because no state had as broad a rule as the FTC issued. In addition, the FTC did not consider any alternatives to the rule. Ultimately, the Court held as follows: “Having concluded that (i) the FTC promulgated the Non-Compete Rule in excess of its statutory authority, and (ii) the Rule is arbitrary and capricious, the Court must ‘hold unlawful’ and ‘set aside’ the FTC’s Rule as required” under the APA on a nationwide basis.
This decision will likely be appealed to the Fifth Circuit Court of Appeals. What happens next depends largely on the outcome of 2024 Presidential Election. If former President Trump wins, the Administration will likely withdraw the appeal, and the matter will be settled with the new Rule never going into effect. If Vice-President Harris wins, the Fifth Circuit will likely affirm the lower court decision, and the Administration will likely appeal to the Supreme Court. Given the recent decisions by the Supreme Court, it is highly likely the Court will uphold the lower court’s invalidation of the new Rule. In either case, it is hard to see an outcome where the Texas court’s decision is overturned. As a result, for now the Rule is stricken in its entirety, and it is almost certain the FTC non-compete Rule will never go into effect.
While the FTC rule baring non-compete agreements appears to be extinguished, employers must remember several states have banned non-compete agreements entirely (e.g., California, Minnesota, North Dakota, and Oklahoma) while many others have severely restricted the use of non-compete provisions (e.g., Illinois, Oregon, Washington). And states like Wisconsin have specific statutes governing the enforceability of these provisions. Thus employers must be mindful when using non-compete provisions to ensure compliance with applicable state law.
If you have any questions about this Legal Update or employment law, please contact:
Attorney Joel S. Aziere, 262-853-0600, jaziere@buelowvetter.com.
