Court Strikes Down FTC’s Non-Compete Ban
Client Updates
On July 10, 2024, we sent an update informing readers that Judge Ada Brown of the United States District Court for the Northern District of Texas had entered a preliminary injunction blocking the Federal Trade Commission (“FTC”) from enforcing its non-compete ban, set to take effect on September 4, 2024, against the plaintiffs in the case before the court. While that preliminary injunction was limited, Judge Brown wrote that the court’s final adjudication on the merits should occur on or before August 30, 2024, and she included language in her opinion that raised many employers’ hopes that the court would strike down the ban. True to her word, yesterday, the court entered an order blocking the FTC’s ban on a nationwide basis.
Judge Brown concluded “that the FTC lacks statutory authority to promulgate the Non-Compete Rule, and that the Rule is arbitrary and capricious.” Therefore, the court set aside the FTC’s impending non-compete ban, holding that “the Rule shall not be enforced or otherwise take effect on its effective date of September 4, 2024 or thereafter.”
Judge Brown began the analysis section of her opinion by quoting the U.S. Supreme Court’s recent landmark opinion striking down Chevron deference in Loper Bright Enterprises v. Raimondo for the proposition that Congress enacted the Administrative Procedure Act (“APA”) “as a check upon administrators whose zeal might otherwise have carried them to excesses not contemplated in legislation creating their offices.” After evaluating the FTC’s ban in detail, the court concluded that the FTC both lacked authority to promulgate it and that it is arbitrary and capricious. Accordingly, the court evaluated the proper remedy under the APA and determined that it “must ‘hold unlawful’ and ‘set aside’ the FTC’s Rule as required under § 706(2)” of the APA. Clarifying the breadth of her ruling, Judge Brown recognized Fifth Circuit authority holding that “setting aside agency action under § 706 has ‘nationwide effect,’ is ‘not party-restricted,’ and ‘affects all persons in all judicial districts equally.’”
While this ruling provides great relief to many employers of the estimated 30 million employees subject to non-compete agreements nationwide, it will likely be appealed. Also, it does not affect laws in certain states that already limit or ban non-competes. Nor does it necessarily prevent the FTC from attempting to challenge non-competes on a “case by case” basis, which a spokesperson for the FTC has already signaled it might do.
We are closely following this decision and will update you of any significant developments on appeal, which may not occur for some time. In the meantime, employers no longer need to worry about the FTC’s non-compete ban going into effect on September 4, 2024.
Judge Brown concluded “that the FTC lacks statutory authority to promulgate the Non-Compete Rule, and that the Rule is arbitrary and capricious.” Therefore, the court set aside the FTC’s impending non-compete ban, holding that “the Rule shall not be enforced or otherwise take effect on its effective date of September 4, 2024 or thereafter.”
Judge Brown began the analysis section of her opinion by quoting the U.S. Supreme Court’s recent landmark opinion striking down Chevron deference in Loper Bright Enterprises v. Raimondo for the proposition that Congress enacted the Administrative Procedure Act (“APA”) “as a check upon administrators whose zeal might otherwise have carried them to excesses not contemplated in legislation creating their offices.” After evaluating the FTC’s ban in detail, the court concluded that the FTC both lacked authority to promulgate it and that it is arbitrary and capricious. Accordingly, the court evaluated the proper remedy under the APA and determined that it “must ‘hold unlawful’ and ‘set aside’ the FTC’s Rule as required under § 706(2)” of the APA. Clarifying the breadth of her ruling, Judge Brown recognized Fifth Circuit authority holding that “setting aside agency action under § 706 has ‘nationwide effect,’ is ‘not party-restricted,’ and ‘affects all persons in all judicial districts equally.’”
While this ruling provides great relief to many employers of the estimated 30 million employees subject to non-compete agreements nationwide, it will likely be appealed. Also, it does not affect laws in certain states that already limit or ban non-competes. Nor does it necessarily prevent the FTC from attempting to challenge non-competes on a “case by case” basis, which a spokesperson for the FTC has already signaled it might do.
We are closely following this decision and will update you of any significant developments on appeal, which may not occur for some time. In the meantime, employers no longer need to worry about the FTC’s non-compete ban going into effect on September 4, 2024.
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