US District Court Blocks FTC Ban on Noncompetes
Commentary by Neely Agin
The US District Court for the Northern District of Texas granted summary judgment to plaintiffs challenging the FTC Non-Compete Rule. The District Court held that the FTC "exceeded its statutory authority" and that the rule was "arbitrary and capricious."
As previously covered, in April 2024, the FTC issued a rule to ban non-compete clauses for employees. The final rule provided that "it is an unfair method of competition—and therefore a violation of Section 5 of the FTC Act—for employers ... to enter into non-compete agreements with workers." (See also, Memorandum.)
The plaintiffs, including a Texas tax services firm, the US Chamber of Commerce and other industry groups, contested the FTC's rule arguing that it was promulgated in contravention of the Administrative Procedure Act ("APA"). The Court found that the FTC lacked the power to issue such substantive rules under FTC Act Section 6(g) ("Additional Commission Powers: Classification of corporations; regulations") stating: "the text, structure, and history of the [FTC] Act ... reveal that the FTC lacks substantive rulemaking authority with respect to unfair methods of competition under Section 6(g)."
The Court also noted that the FTC's reliance on limited and flawed evidence did not support such a "sweeping prohibition" and failed to consider less disruptive alternatives. The Court set aside the Non-Compete Rule, preventing it from being enforced or taking effect. The Court blocked the rule as of its September 4, 2024 effective date.
Commentary
While this decision means that the rule will not go into effect next month, uncertainty will continue as the FTC considers whether to appeal the decision. In the meantime, employers should remember that state laws continue to apply, and indeed, that some states may pass new legislation limiting or prohibiting such agreements.
Related Articles
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The Congressional Research Service reviewed the legal challenges concerning the Federal Trade Commission's final rule banning non-compete clauses for employees.
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The FTC issued a rule to ban non-compete clauses for employees. The final rule provides that "it is an unfair method of competition—and therefore a violation of Section 5 of the FTC Act—for employers to enter into non-compete agreements with workers."
