Breaking News—Federal District Court Sets Aside FTC Non-Compete Ban Rule
On August 20, 2024, a federal court sitting in the Northern District of Texas (the Court) struck down the Federal Trade Commission (FTC) rule that would have made unlawful nearly all non-competition agreements (the Rule) and would have otherwise been effective as of September 4.
08.23.24
On August 20, 2024, a federal court sitting in the Northern District of Texas (the Court) struck down the Federal Trade Commission (FTC) rule that would have made unlawful nearly all non-competition agreements (the Rule) and would have otherwise been effective as of September 4. The Court’s order prevents the FTC from enforcing the Rule nationally. The Rule was designed to prospectively and retroactively ban and invalidate virtually all non-competition agreements, as well as impose notification requirements on businesses as to the effect of the Rule. With the litigation pending, but the Rule scheduled to go into effect on September 4, many businesses have been wrestling with the uncertainty of whether the Rule would move forward or be stopped by judicial action. While the Court’s order is subject to a likely appeal, for now at least, the Court has provided clarity.
The Court’s Reasoning: In summary, the Court set aside the Rule because it held that: (1) Congress did not provide the FTC with substantive rule-making authority; and (2) that even if the FTC did have this authority, the Rule was arbitrary and capricious. As to the FTC’s authority, the Court ruled that the FTC’s rulemaking authority, delegated by Congress, did not extend to substantive rules that would ban the use of non-competition agreements on a national scale. Further, the Court set aside the Rule as arbitrary and capricious because it concluded that the scope of the Rule was too broad and no less restrictive alternatives were considered.
Appeal: It is likely that the FTC will appeal the Court’s order to the United States Court of Appeals for the Fifth Circuit. During the pendency of any appeal, the Rule will not be effective.
Impact to Businesses: As of the date of this Alert, the non-competition agreement landscape remains unchanged. If a non-competition agreement was enforceable prior to the Court setting aside the Rule, it remains enforceable today. It is important to understand that the Court’s order does not invalidate state or local restrictions on non-competition agreements.
Co-authors Jonathan Krause, Litigation Department co-chair, and Gregory Sellers, Of Counsel, are members of the labor & employment practice group at Klehr Harrison.