Texas Federal Court Blocks Enforcement of the FTC Non-Compete Rule
On Tuesday, August 20, the Federal District Court for the Northern District of Texas issued a ruling finding that the Federal Trade Commission (FTC) did not have authority under the law to issue its rule prohibiting most non-compete agreements. The court had previously ruled in favor of the Chamber of Commerce and a tax firm and granted a preliminary injunction, but this initial ruling was limited to the plaintiffs in the case. The court’s new ruling applies nationwide.
The FTC had adopted a rule in April that would ban almost all non-compete agreements on the grounds that they represented an unfair method of competition. The rule, which was scheduled to come into effect September 4, 2024, had limited exceptions for non-compete agreements connected to the sale of a business and applied to all workers except for senior executives. The court found that the FTC did not have authority under the Federal Trade Commission Act to adopt the rule because the Act gave the FTC only the power to adopt procedural rules, not to issue substantive rules defining unfair methods of competition. The court also concluded that “the Rule is arbitrary and capricious because it is unreasonably overbroad without a reasonable explanation”. In determining the appropriate remedy, the court ruled that since it had determined that the rule exceeded the FTC’s statutory authority and was arbitrary and capricious, the proper remedy was to set aside the rule on a nationwide basis.
Two other cases challenging the rule have been filed, in Florida and in Pennsylvania. The judge in the Pennsylvania case had entered a preliminary ruling in favor of the FTC. The FTC has issued a statement that it is evaluating an appeal of the Texas ruling.
The practical impact of this ruling is that the FTC’s rule will not come into effect on September 4, 2024. Therefore, existing non-compete agreements will remain valid (subject to state law requirements). Employers who have entered into agreements containing non-compete clauses will not be required to notify employees that the restrictions are unenforceable, as the FTC had required.
We will continue to follow this issue and keep you informed.
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