On August 20, 2024, the United States District Court for the Northern District of Texas (Dallas Division) struck down the Federal Trade Commission’s (FTC) non-compete rule, 16 CFR § 910.1-6, that was set to take effect on September 4, 2024. A summary of this ruling, which has significant implications for employers nationwide, is included below. This post is a follow-up to our previous post summarizing the prior conflicting opinions regarding whether the FTC had the authority to ban non-compete clauses.
This case originated when the plaintiff, Ryan LLC, challenged the lawfulness of the FTC’s non-compete rule. Ryan LLC was joined by plaintiff-intervenors, the United States Chamber of Commerce, Business Roundtable, Texas Association of Business, and Longview Chamber of Commerce, who also challenged the FTC’s authority to enact the FTC non-compete rule. The FTC’s non-compete rule would have preempted state law and invalidated employment contracts containing non-compete clauses nationwide.
The court reasoned, first, that the FTC’s non-compete rule exceeded the FTC’s authority because it does not have the authority to promulgate substantive rules regarding unfair methods of competition. The court further found the FTC’s non-compete rule to be arbitrary, capricious, and in violation of the Administrative Procedure Act as the FTC failed to justify the expansive breadth of its ban. Therefore, the court ultimately granted the plaintiff’s motion for summary judgment and denied the FTC’s cross-motion for summary judgment, setting aside the non-compete rule.
In conclusion, the court stated, “the Rule shall not be enforced or otherwise take effect on its effective date of September 4, 2024, or thereafter.” The court’s summary judgment order applies nationwide and means that the non-compete agreements that were enforceable before the rule remain enforceable, and new non-compete agreements may be entered into depending on state law. It is possible that the FTC may appeal the ruling to the Fifth Circuit; however, the FTC has not yet indicated whether it will do so. We will continue to monitor the status of the FTC’s non-compete rule and provide any subsequent updates.