On August 20, 2024, a federal court in Dallas, Texas, found unlawful and set aside the Federal Trade Commission’s Rule on Noncompete Clauses (the “Rule”) issued by the agency on April 30, 2024. Scheduled to take effect on September 4, the Rule attempted to invalidate most already-existing noncompete covenants and to ban all noncompetes entered into after September 4. The same court issued a preliminary injunction against the Rule in July 2024, but that injunction applied only to the two plaintiffs in the case (Ryan LLC and the U.S. Chamber of Commerce), leaving employers nationwide uncertain as to whether they needed to comply with the Rule in September. The August 20 decision makes clear
that employers nationwide need not comply with the FTC Rule on September 4 or thereafter.
The court’s August 20 ruling decided the parties’ cross-motions for summary judgment, granting the Plaintiffs’ motion and denying the FTC’s motion. In so doing, the court reviewed the FTC Rule under standards established by the Administrative Procedure Act (APA), a 1946 law enacted by Congress, which, among other things, set the basic contours for court review of agency action. Applying the APA, the court found that the FTC exceeded its statutory authority in implementing the Rule, and that the rule is arbitrary and capricious.
The FTC promulgated the Rule under Section 6(g) of the Federal Trade Commission Act, the 1914 statute that created the agency and authorized it to prevent unfair methods of competition. The court emphasized that “[a]gencies are creatures of Congress – ‘an agency literally has no power to act . . . unless and until Congress confers power upon it.’ ” (citations omitted). Discussing Section 6(g) of the FTC Act, which the agency claimed gave it authority to issue the Rule, the court concluded that “the structure and location of Section 6(g) indicate that Congress did not explicitly give the Commission substantive rulemaking authority under Section 6(g).” The court found that by
promulgating the Rule, the FTC exceeded its statutory authority.
The court then considered a second ground for review under the Administrative Procedure Act: whether the Rule is arbitrary and capricious. The court answered that question in the affirmative, noting that “[t]he Rule imposes a one-size-fits-all approach with no end date, which fails to establish a ‘rational connection between the facts found and the choice made.’” (citations omitted). Further, “the Rule is based on inconsistent and flawed empirical evidence, fails to consider the positive benefits of noncompete agreements, and disregards the substantial body of evidence supporting these agreements.”
Finding that the FTC lacked statutory authority to issue the Rule, and that the Rule is arbitrary and capricious, the court held the promulgation of the Rule to be an unlawful agency action under the Administrative Procedure Act. As such, the remedy is to set aside the Rule, on a nationwide basis, affecting persons in all judicial districts equally, and not restricted only to the parties in the case.
The Texas court’s ruling marks a defeat for the Biden-Harris Administration, which in a 2021 Executive Order directed the FTC to exercise its rule-making authority to curtail the use of noncompetes. This may, however, not be the last word on this issue. Unbowed, the FTC issued a statement that it is considering an appeal, and that the court ruling does not prevent the FTC from addressing noncompetes through case-by-case enforcement actions. Moreover, two other federal court cases challenging the Rule remain pending: one in Pennsylvania (which refused to enjoin the Rule), and one in Florida (which narrowed the Rule). For now, however, with September 4 looming, the Texas court’s decision provides
clear guidance to employers: the FTC Rule is invalid, and Employers may continue to utilize and enforce noncompetes on the same basis as they did before the FTC issued the Rule.
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