FTC rule declared unenforceable nationwide
If your podcast California Employment News is something you listen to, you’re aware that the Federal Trade Commission has issued a rule which would effectively ban non-compete agreements. The ban, which would have gone into effect next month, would have invalidated millions of non-compete agreements, and prohibited non-compete clauses in future agreements between employees, independent contractors and other workers. The ban would have preempted 46 state laws that regulate non-compete. In a victory for employers and business owners nationwide who rely on some form of non-competition provision to protect their IP, the United States District Court for the Northern District of Texas invalidated the FTC rule in its ruling on August 20, 2024.
Ryan LLC v Federal Trade Commission
The Ryan LLC case was one of three pending cases filed to challenge the FTC rule – one in Texas, one in Pennsylvania, and one in Florida – but was the first filed. In July, the Texas court issued a preliminary order that indicated it was ready to invalidate the FTC rule. The preliminary injunction was only applicable to the parties involved in the case, Ryan LLC, and certain trade associations that had intervened, leaving the FTC to enforce the rule across the country. The Pennsylvania district court reached the opposite conclusion and denied the preliminary injunction in that case to the plaintiff. On August 20, 2024, however, the Texas court put an end to the impending disruption of an estimated 30 million employment agreements, by granting Ryan LLC’s summary judgment motion and denying the FTC’s cross-motion.
The Court ruled that the FTC Rule exceeded the FTC’s statutory authority. The FTC can prevent covered entities from using unfair competition in commerce but it cannot promulgate “substantive rules” that prohibit unfair competition methods. Rather, the FTC can only promulgate “rules of agency organization procedure or practice.”
The Court also found that the Rule is “arbitrary and capricious” because the FTC failed to justify the extremely broad scope of its ban. Its “sweeping ban” on all non-compete provisions was unreasonable and unjustified. The court’s summary judgment ruling applies nationwide.
The result is that, for now, the FTC’s non-compete rule now cannot take effect on September 4 and the FTC cannot enforce it, anywhere in the nation. The FTC could still appeal to the Fifth Circuit Court of Appeals and the Pennsylvania case to the Third Circuit. The Supreme Court could ultimately decide this issue. Employers do not need to worry about the FTC rule because existing state laws continue to apply.
