FTC Rule Ruled Unenforceable Nationwide
Published: August 26, 2024
If you have been following our podcast California Employment News, you know that the Federal Trade Commission issued a rule that would act as a comprehensive ban on non-compete agreements. The ban would have taken effect next month, and would have invalidated non-compete provisions in millions of existing agreements and would have precluded non-compete provisions in future agreements with employees, independent contractors, volunteers and other workers. It would have preempted the laws of the 46 states that already regulate noncompete. 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. An early sign that the Texas court was poised to invalidate the rule came in July, when it issued a preliminary injunction. However, that preliminary injunction only applied to the parties to that case, Ryan LLC and certain trade associations who had intervened – leaving the FTC free to enforce the rule nationwide. And, the Pennsylvania district court came to the opposite conclusion, denying the preliminary injunction to the plaintiff in that case. 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. Although the FTC has the power to prevent covered entities and persons from using unfair methods of competition in commerce, it does not have authority to promulgate “substantive” rules prohibiting 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 prohibition” on all noncompete provisions, rather than “targeting specific, harmful non-competes” 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 still could appeal to the Fifth Circuit Court of Appeals, and the Pennsylvania case can be appealed to the Third Circuit. Ultimately, the Supreme Court may decide this issue. But, meanwhile, employers need not worry about compliance with the FTC’s rule, and existing state laws will continue to apply.