In April 2024, the FTC proposed a nationwide ban on noncompete agreements set to take effect on September 4, 2024.
In the wake of that proposed “Final Noncompete Clause Rule,” which purported to preempt conflicting state laws and ban nearly all employee noncompete agreements on the basis that they are “unfair methods of competition,” several businesses and trade groups filed suit to block the Rule from taking effect.
On August 20, the U.S. District Court for the Northern District of Texas held that the FTC’s Proposed Rule exceeded the FTC’s authority because it was a substantive rule, rather than procedural, which the FTC does not have authority to promulgate under Section 6(g) of the Administrative Procedures Act. The court also held the Rule to be arbitrary and capricious because it is “unreasonably overbroad without a reasonable explanation,” and that it failed to consider the benefits of noncompetes or alternative measures. The court found that the 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.” The court granted summary judgment in favor of the plaintiffs and permanently blocked the Rule on a nationwide basis.
This result of the federal court blocking the Noncompete Rule is not surprising on several levels, not the least of which being the U.S. Supreme Court’s recent decision in Loper Bright, which overruled Chevron deference, greatly reduced agency rule-making power and may not portend well for the FTC.
The FTC may appeal the federal court's block on the Noncompete Rule, so the issue will likely wind its way through the courts for months or years to come.
Other cases are also considering the issue – a Florida federal court recently issued a similar ruling adverse to FTC, while a federal court in Pennsylvania issued a decision upholding the Rule. If ultimately a circuit split exists, the U.S. Supreme Court could take up the issue.
In the meantime, lawyers who counsel employers will want to keep an eye on this issue, to make sure noncompetes comply with state law until final resolution of the legal cases.
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Read a copy of the Texas decision here: Ryan LLC v. Federal Trade Commission
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