The FTC’s Non-Compete Rule is enjoined: Texas Court sets Rule aside and issues nationwide injunction

On August 20, 2024, after months of uncertainty, the Northern District of Texas (Ryan LLC et al. v. Federal Trade Commission) provided nationwide clarity on the status of the FTC’s Non-Compete Rule, which sought to effectively ban most non-competition agreements with few exceptions. Issuing a nationwide injunction halting the Rule’s enforcement, the Texas court deemed the Non-Compete Rule unlawful, set it aside, and ordered that the “Rule shall not be enforced or otherwise take effect on its effective date of September 4, 2024, or thereafter.”

In reaching its decision, the Court also found that “the FTC exceeded its statutory authority in implementing the Rule.” The Court provided four main points to support its conclusion:

• The FTC has some “authority to promulgate rules to preclude unfair methods of competition” but lacks “the authority to create substantive rules to preclude unfair methods of competition;”
• The “lack of a statutory penalty for violating rules promulgated under Section 6(g) [of the FTC Act] demonstrates [the FTC’s] lack of substantive rulemaking power” and “supports that such provision encompasses only housekeeping rules – not substantive rulemaking power;”
• The “structure and the location of Section 6(g) [of the FTC Act] indicate that Congress did not explicitly give the [FTC] substantive rulemaking authority under Section 6(g);”
• The “text and the structure of the FTC Act reveal the FTC lacks substantive rulemaking authority with respect to unfair methods of competition.”

The court also found that “the Rule is arbitrary and capricious,” “is based on inconsistent and flawed empirical evidence, fails to consider the positive benefits of non-compete agreements, [] disregards the substantial body of evidence supporting these agreements,” and that “the FTC failed to sufficiently address alternatives to issuing the Rule.”

In addition to concluding that the Rule is an unlawful agency action, the court refused to limit relief to the named parties and, instead, implemented national injunctive relief. This means that employers can breathe a sigh of relief for the time being. Although it is possible that the FTC will appeal this decision and/or seek alternative methods to limit competition it deems unfair, the current Rule cannot be enforced on or after September 4, 2024.

Employer Takeaways:

• Most importantly, employers are not required to disseminate any notices regarding the lack of enforceability of any non-compete agreements as was required by the FTC Rule;
• Generally moving forward, reasonably tailored non-compete agreements will continue to be enforced subject to applicable state law;
• Employers need to monitor the progress and results of the likely appeal of the Texas court’s ruling regarding the FTC Rule; and
• In the meantime, employers need to remain vigilant for any further attempts by the government, including state and/or federal legislatures, potential additional action by the executive branch, among other potential actions, to modify the enforceability of their non-compete agreements.

Please consult your McDonald Hopkins attorney if you have questions about this Rule or your restrictive covenant program.