What is the status of the Federal Trade Commission’s recent rule banning non-compete agreements as unfair competition? The United States District Court for the Northern District of Texas recently set aside the rule, preventing the rule from taking effect.

As reported in a prior article, Ryan, Inc. and the US Chamber of Commerce filed suit to prevent the FTC’s non-compete ban from taking effect. On July 3, 2024, the Court granted a temporary injunction to prevent the rule from going into effect. On August 20, 2024, the Court granted Ryan’s and the US Chamber’s (now an intervenor in Ryan’s lawsuit) motions for summary judgment, permanently blocking enforcement of the rule.

The basis of the Court’s holding was anticipated in the lengthy 560 page justification and background the FTC issued in support of the rule. Ryan challenged the FTC’s authority under the Administrative Procedure Act, arguing that the rule, developed under Section 6(g) of the FTC Act, exceeded the agency’s statutory authority, was patently unconstitutional, and was arbitrary and capricious. The Court agreed with two of Ryan’s three arguments.

If the FTC appeals no other portion of the Court’s opinion, it will be likely be this one: Based on the text, structure, and history of the FTC Act, ‘the FTC lacks the authority to create substantive rules with respect to unfair methods of competition through Section 6(g).’ The Court characterized that Section as a ‘housekeeping statute,’ authorizing what the APA terms ‘rules of agency organization procedure or practice’ as opposed to ‘substantive rules.’ As this goes to the core of FTC’s rule-making authority, we can expect the FTC to vigorously oppose any infringement of its ability through the appellate process.

The Court also held that the non-compete ban was arbitrary and capricious. It concluded that the rule was unreasonably overbroad without a reasonable explanation. The rule, in the Court’s view, imposed a one-size-fits-all approach with no end date, which failed to establish a ‘rational connection between the facts found and the choice made.’ The Court chastised the FTC for relying on a handful of studies that examined the economic effects of various state policies toward non-competes, but failing to provide any evidence as to why a sweeping prohibition—one that prohibits entering or enforcing virtually all non-competes—was selected instead of targeting specific, harmful non-competes. In addition, the Court found that the FTC failed to sufficiently address alternatives to issuing the rule. According to the Court, the FTC instead offered a conclusion that a case-by-case adjudication of the enforceability of non-competes would create a threateningatmosphere that would undermine the FTC’s objective to address the negative effect of non-completes on competitive conditions.

The Court’s granting of Ryan’s and the US Chamber’s motions for summary judgment prevents the FTC’s non-compete ban from taking effect. It is almost certain that the FTC will appeal the Court’s ruling, and that this case will eventually find its way to the US Supreme Court.

The attorneys in our Austin and Dallas office have significant experience assisting clients with employment matters. Please contact us at info@gstexlaw.com with any questions you may have.

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