Federal Court Finds FTC Non-Compete Rule Unlawful

On August 20, 2024, the U.S. District Court for the Northern District of Texas set aside the Federal Trade Commission’s (FTC) Non-Compete Rule. As discussed in our prior e-lert on July 5, 2024, the FTC Non-Compete Rule would essentially ban all non-compete agreements in the United States and require employers to notify employees currently subject to non-competes that the restrictions were void. The Texas court previously preliminarily enjoined the Rule as to only the parties in the case, as we noted in our prior e-lert. The court’s August 20 decision set aside the Rule, meaning the Rule will not be enforced or take effect on September 4, 2024.

The court described the dispute as one regarding the FTC’s rulemaking authority. The court summarized the plaintiffs’ position as follows: (1) the FTC acted without statutory authority, (2) the Rule is the product of an unconstitutional exercise of power, and (3) the FTC’s acts, findings, and conclusions were arbitrary and capricious, as well as (4) a challenge to the Rule as unlawful under the Declaratory Judgment Act.

The court’s order followed motions by both parties for summary judgment, which included briefing on the proper remedy, which the court had requested from the parties. The court reached the decision that the plaintiffs were entitled to summary judgment because the FTC exceeded its statutory authority in implementing the Rule and the Rule is arbitrary and capricious, concluding that (1) the FTC lacks substantive rulemaking authority with respect to unfair methods of competition, (2) the evidence the FTC relied upon was insufficient, and (3) the FTC did not adequately consider less disruptive alternatives.

As to the appropriate remedy, the Court noted that the Administrative Procedures Act requires a court to “hold unlawful and set aside agency action” that is found to be arbitrary and capricious or in excess of statutory authority. Because the court drew those conclusions, it found that it was required to set aside the FTC Rule.

We expect the ruling to be appealed, and we will continue to update you on developments regarding the FTC Rule’s fate in the courts.