Earlier this year, we provided an update on the United States Federal Trade Commission (FTC)’s promulgation of its Rule banning non-compete agreements.  Expectedly, the Rule was challenged. On August 20, 2024, the United States District Court for the Northern District of Texas issued an opinion and order setting aside the FTC’s Non-Compete Ban and preventing its enforcement. 

WHAT HAPPENED?

When the FTC published its Rule banning non-compete agreements on April 23, 2024, Texas-based global tax services and software company Ryan, LLC filed a lawsuit against the FTC arguing the FTC’s actions were (1) unlawful because it acted without statutory authority, (2) the Rule was a product of an unconstitutional exercise of power, and (3) the FTC’s acts, findings, and conclusions were arbitrary and capricious. Additional entities, including the United States Chamber of Commerce, intervened into the lawsuit against the FTC.  On July 3, 2024, the court granted a preliminary injunction against the FTC before issuing a final opinion in this case.

WHAT DID THE COURT SAY?

In its final opinion on August 20, 2024, the court addressed the issues on the merits.  In doing so, it made clear that it was relying upon the plain reading of the Federal Trade Commission Act, and in particular, Section 6(g) of the Act, which allowed the FTC to classify corporations and make rules and regulations for the purpose of carrying out its duties, but did not expressly grant the FTC authority to promulgate substantive rules regarding unfair methods of competition. Rather, the FTC was restricted to “housekeeping” procedural rules. 

After the court decided that the FTC exceeded its authority in promulgating the Rule banning noncompete agreements, the court also deemed the Rule to be arbitrary and capricious because it was “unreasonably overbroad without a reasonable explanation.” The Rule “impose[d] 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,’” and the FTC failed to address alternatives to issuing the Rule. 

WHAT DOES THIS MEAN FOR YOU?

While the court’s decision may be appealed, the FTC’s Rule is currently still ineffective and will not be imposed. The court held the Rule was unlawful and set it aside. The court further held that the Rule “shall not be enforced or otherwise take effect on its effective date of September 4, 2024, or thereafter.”

Even without a national ban, if you are a party to a noncompete agreement or wish to implement them in your business practice, there are still case laws and local rules that apply to enforceability. Whatever your noncompete agreement needs are, the attorneys at Foley, Baron, Metzger & Juip, PLLC are here to assist you.

For more information on this new ruling contact FBMJ attorneys Joseph McGill or Silvia Alexandria Mansoor.