After Months Of Uncertainty, A Federal Court Has Blocked The FTC's Non-Compete Rule On A Nationwide Basis

A judge in the Northern District of Texas issued an order setting aside the Federal Trade Commission's rule banning non-compete agreements and ordered that the rule shall not be enforced or otherwise take effect on September 4, 2024. This much-awaited decision comes after the judge already issued a limited preliminary injunction in the same case in early July as to the named plaintiffs there (discussed here). Although multiple other courts have recently weighed in on the issue to mixed results, including federal courts in Pennsylvania and Florida (see here), the Texas judge's ruling has resulted in the first nationwide prohibition on the FTC's enforcement of the rule. Accordingly, barring any intervening appellate activity, the FTC's rule will no longer go into effect on September 4, 2024 (the original effective date), employers will not be required to void employees' existing non-competes covered by the rule, and employers are no longer required to send employees notices regarding the status of any non-competes.

In granting summary judgment for the plaintiff and other intervenors, the Court reasoned that the FTC lacked statutory authority to implement the rule, as Congress has not granted the FTC authority to promulgate substantive rules regarding unfair methods of competition under the FTC Act. The Court analyzed the text, structure, and history of the FTC Act and cited recent Supreme Court precedent, including Loper Bright Enters. v. Raimondo, 144 S. Ct. 2244 (2024) (ending Chevron deference to federal regulatory agencies) in support of its decision.

The Court also held that the rule was "arbitrary and capricious" in violation of the Administrative Procedure Act "because it is unreasonably overbroad without a reasonable explanation" and that "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 decision also questioned "[t]he Commission's lack of evidence as to why they chose to impose such a sweeping prohibition" rather than "targeting specific, harmful non-competes."

The Court's decision puts an end (for now) to any employer requirements under the rule (the broad contours of which we discussed here and here). While appellate activity including a challenge from the FTC is all but certain, the hotly contested rule's effective date is now paused pending any appellate rulings. Regardless of any future appellate activity as to the FTC rule, employers are well-advised to continue their careful consideration of non-compete use given the recent push in some jurisdictions to ban or limit them (as discussed more fully here). Employers looking to consider alternatives have a multitude of options at their disposal to prevent post-employment unfair competition, including by using confidentiality, trade secret, and invention assignment agreements, implementing broad trade secret protection programs, and entering into appropriately tailored non-solicitation agreements.