On August 20, a federal judge in Texas permanently blocked the Federal Trade Commission's ("FTC") rule that would have banned nearly all noncompete agreements nationwide. The court held that FTC lacked statutory authority to promulgate the rule and that, in any event, it was arbitrary and capricious in violation of the Administrative Procedure Act ("APA"). This means the rule will not take effect as scheduled on September 4 and no employer can be required to comply with it at this juncture.
The Court's Ruling
The court granted the challengers' motions for summary judgment, denied FTC's cross-motion, and "set aside" the rule on a nationwide basis. The court held that the "text, structure, and history" of FTC's organic statute showed a lack of Congressional authorization to create "substantive rules regarding unfair methods of competition"—and thus FTC lacked authority to create the rule at all. The court further held that the substance of the rule was arbitrary and capricious because it was a "categorical ban" on noncompete agreements that was a "one-size-fits-all approach with no end date," was based on "inconsistent and flawed" data, and lacked a "rational connection between the facts found and the choice made." Notably the court explained that FTC failed to consider the "positive benefits" of noncompete agreements and disregarded related evidence. Such a "sweeping prohibition" on "virtually all" noncompete agreements without evidence—instead of even considering alternatives such as a more limited rule that targeted "specific, harmful" agreements—was in the court's view arbitrary and capricious in violation of the APA. All told, the court could not conclude that the rule was "within a zone of reasonableness" or "reasonably explained."
What's Next
FTC has indicated it will likely appeal the court's decision, teeing up further judicial review of the rule in the months ahead. FTC can continue to take individual enforcement actions regarding noncompete agreements it considers to be unfair competition. And state laws that restrict the terms of or outright ban certain types of noncompete agreements, such as those in those in Maryland and the District of Columbia, remain in effect and thus require thoughtful analysis around entering into or attempting to enforce any given noncompete agreement.
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