On August 20, 2024, the U.S. District Court for the Northern District of Texas ruled against the Federal Trade Commission (the “FTC”) and set aside its sweeping rule which would have generally prohibited companies from utilizing non-compete agreements with employees (the “Non-Compete Rule” or the “Rule”).[1] The Rule was set to take effect on September 4, 2024.
In reaching its decision to set aside the Rule, the court found that the FTC did not have statutory authority to issue the Non-Compete Rule. The court’s reasoning on this point echoed the reasoning in its July 3, 2024 decision, in which the court granted a temporary injunction. The court went further than its July ruling by finding that the Rule must be set aside on the grounds that it is “arbitrary and capricious” because its complete ban on non-competes was “unreasonably overbroad without a reasonable explanation.”[2]
In granting a preliminary injunction on July 3, 2024, the court’s ruling was limited to prohibiting the Rule’s enforcement as to the named-plaintiffs in that case. In this decision, the court “set aside” the Rule in accordance with the Administrative Procedures Act (the “APA”). As the court explained, “setting aside agency action under [the APA] has ‘nationwide effect.’”[3] Therefore, unless and until this decision is reversed on appeal, the Rule will not become effective.
According to reports, the FTC is considering an appeal and in light of the recent decision from the Eastern District of Pennsylvania where the court reached the opposite conclusion[4]—i.e., that the FTC did have statutory authority to promulgate the Rule—an appeal is likely. It is important to note that the decision from the Eastern District of Pennsylvania does not impact the validity of the Rule, in that, a ruling from the Eastern District of Pennsylvania (or any other federal district court) cannot resurrect the Rule now that it has been set aside by the Northern District of Texas.
While this decision is a welcome piece of clarity on the status of the Rule ahead of the effective date, it is important that employers stay up to date on this issue as there remains a possibility that the court’s decision may be reversed on appeal. The Koley Jessen Employment, Labor, and Benefits Department will continue to monitor the developments on the Non-Compete Rule and the legal challenges to the Non-Compete Rule and will provide additional guidance as needed. Employers with questions about the Non-Compete Rule or the court’s decision, should contact a member of our Department.
[1] Ryan, LLC v. Federal Trade Commission, No. 3:24-CV-00986-E (N.D. Tex. Aug. 20, 2024).
[2] Id. at 23‑24.
[3] Id. at 26.
[4] ATS Tree Services, LLC v. Federal Trade Commission, No. 24-1743 (E.D. Pa. July 23, 2024).
