In a highly-anticipated ruling, a Texas federal court concluded on July 3, 2024, that the Federal Trade Commission ("FTC") exceeded its authority by enacting its rule in April 2024 that purports to ban nearly all noncompete agreements. Our summary and assessment of that rule can be found here.
In a 33-page opinion, Judge Ada Brown found that Congress did not delegate authority to the FTC to enact such a sweeping measure. She found 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." The court further found that the FTC acted arbitrarily and capriciously because the rule "is unreasonably overbroad without a reasonable explanation." The court noted that "no state has ever enacted a non-compete rule as broad as the FTC's Non-Compete Rule."
Significantly, however, the court limited its ruling to the parties—the Ryan, LLC tax services firm and the U.S. Chamber of Commerce and affiliated groups—and enjoined enforcement of the rule as to those parties. It declined to issue a nationwide injunction (or even extend the ruling to Chamber members) on the basis that the parties did not adequately brief whether a nationwide injunction would be appropriate.
So what happens now?
Because a nationwide injunction was not issued, the rule is still set to go into effect on September 4, 2024. However, many anticipate that, before that date, another court will issue a nationwide injunction. For instance, a Pennsylvania federal court has announced that it will weigh in on this issue by July 23, 2024. There are also reports that the Chamber of Commerce will ask the Texas court to reconsider that issue based on further briefing. In the meantime, the Texas court's current ruling may be appealed by either party to the Fifth Circuit Court of Appeals and, ultimately, to the Supreme Court. Particularly given the Supreme Court's recent overturning of the Chevron doctrine (requiring courts to defer to administrative agencies), few commentators expect the FTC's rule to survive.
What should employers do?
We suggest that employers sit tight, not change their existing practices concerning non-compete agreements, and allow this to play itself out a bit more. We believe there is a very good chance that there will be a nationwide halt of the new rule before it is set to go into effect in September.
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