Texas Federal Judge Blocks FTC Non-Compete Ban
August 21, 2024 by Margaret Mead
Yesterday Federal District Judge Ada Brown, of the Northern District of Texas, blocked the Federal Trade Commission’s (“FTC”) Noncompete Rule that would have imposed a near complete ban of employee non-compete agreements nationwide as of September 4, 2024. The Order is nationwide and was effective immediately.
Yesterday’s Order & Its Impact
Under the Administrative Procedure Act (“APA”), which empowers a reviewing court to hold unlawful and set aside certain agency action(s), findings, and conclusions, Judge Brown found that the FTC Act does not authorize the FTC to engage in substantive rulemaking. Judge Brown held that the FTC acted without statutory authority, the Rule is the product of an unconstitutional exercise of power, and the FTC’s acts, findings, and conclusions supporting the Rule were “arbitrary and capricious.”
The FTC’s Proposed Non-Compete Ban
The Rule, if implemented, would prohibit employers from entering non-compete agreements with most workers and further would require employers to rescind existing non-compete agreements with impacted employees no later than the Rule’s compliance date. The FTC carved out some exceptions to the ban, including: (1) Senior Executives (defined as those in policy-making positions earning at least $151,164 annually); (2) bona fide sales of businesses; (3) circumstances where a cause of action accrued prior to the effective date; and (4) circumstances where a person has a good-faith basis to believe that the Rule is inapplicable. The Rule specifically would supersede state laws permitting non-compete agreements.
Brief History of Challenges to FTC Ban
The FTC proposed the Rule in May 2024 after years of studying the consequences of non-compete agreements. The Rule has faced several legal challenges from businesses and industry groups since May, who argue that the FTC overstepped its authority. Notably, in a July 23, 2024 ruling, the Federal District Court in the Eastern District of Pennsylvania held that an employer failed to show that the FTC lacks substantive rulemaking authority in ATS Tree Services, LLC v. Federal Trade Commission. In Texas, Ryan, LLC, along with several other plaintiffs, including the U.S. Chamber of Commerce, challenged the Rule in Ryan, LLC v. Federal Trade Commission, the case in which Judge Brown issued yesterday’s opinion. The ruling emerged from the Court’s consideration of a Motion for Summary Judgment by Ryan, LLC and other plaintiffs, and a Cross-Motion for Summary Judgment by the FTC. Judge Brown granted the Plaintiffs’ Motion while denying the FTC’s Cross-Motion. The U.S. Supreme Court’s ruling earlier this year in Loper Bright Enterprises v. Raimondo (holding that courts should interpret ambiguous statutes without deference to federal agency opinions and reversing the 1984 case Chevron U. S. A. Inc. v. Natural Resources Defense Council, Inc.) foreshadowed Judge Brown’s ruling.
What Could Happen Next and Recommendations
Judge Brown’s ruling undoubtedly comes as a welcome relief to most employers, who already struggle to prevent employees from taking their confidential information to competitors, while employees naturally see the ruling as perpetuation of contracts that inhibit their ability to leave undesirable employers for better opportunities. We expect the FTC to appeal Judge Brown’s ruling to the Fifth Circuit Court of Appeals. With diverging opinions potentially emerging in other circuits, the chances of the issue going before the U.S. Supreme Court will increase.
There has been much premature buzz about the lack of enforceability of non-compete agreements, likely due to all the headlines regarding the FTC’s planned ban. However, following yesterday’s Order, employers and employees must respect the various state by state laws addressing non-compete agreements when utilizing and agreeing to non-compete agreements. A few states have limited the enforceability of restrictions on competition or eliminated them in most scenarios altogether. Texas, however, continues to enforce properly drafted non-competes meeting statutory guidelines.
Margaret Mead
margaret@brownfoxlaw.comMargaret Mead is a board-certified labor and employment attorney, with over two decades of experience. As a fierce litigator, she has represented clients in Texas State and federal courts and before state and federal agencies (EEOC, TWC, Department of Labor). Originally from Kansas and a KU Alumni, Ms. Mead is a Jayhawks basketball enthusiast. She enjoys attending local musical and dance performances. She also enjoys travel and scuba-diving.
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