Closing a Loop: Texas Court Sets Aside FTC’s Non-compete Ban Nationally
Closing a Loop: Texas Court Sets Aside FTC’s Non-compete Ban Nationally
It’s somewhat old news by now, but on August 20, 2024, the federal court in the Northern District of Texas held that a rule adopted by the Federal Trade Commission (“FTC”) relating to non-compete agreements (the “Rule”) was unlawful and, crucially, set it aside on a nationwide basis (Ryan LLC v. Federal Trade Commission, 3:24-cv-00986 (N.D. Tex.)). As note in a previous post, the Rule would have banned non-competes except in the context of business sales, voided pre-existing non-competes except with respect to some “senior executives,” and required employers to notify workers if non-competes they had entered into were invalid. The court determined that the FTC lacked the statutory authority to enact sweeping substantive rules with such potentially broad impact and that the rule was arbitrary and capricious. The Rule was scheduled to take effect September 4, 2024.
It remains to be seen whether the FTC will appeal the Texas court’s decision to the Fifth Circuit, a business friendly court from which an adverse opinion might seek more fulsomely to limit the agency’s power.
Concurrently, two addtional challenges to the Rule are pending. The FTC has indicated that it will appeal to the Eleventh Circuit a decision of a Florida court that enjoined the FTC from enforcing the Rule against the particular plaintiff in that case. The Florida court based its decision on the “major questions” doctrine, which bars agencies from resolving questions of “vast economic and political significance” without clear statutory authorization to do so. In contrast, in Pennsylvania, a federal court refused to enjoin enforcement of the Rule against a particular plaintiff, finding, among other things, that the FTC did, in fact, have substantive authority to issue the Rule. A “circuit split” could ultimately result in the Supreme Court’s review of the Rule. Given the Supreme Court’s recent overturning of the longstanding Chevron doctrine, under which courts had deferred to agencies’ interpretation of statues relevant to their mission, the Rule’s ultimate demise would seem likely.
Though employers have reason to breathe more freely as a result of the Texas court’s ruling in Ryan, they should be aware that the Rule and the challenges to it may have re-invigorated interest among state legislatures in curtailing non-competes. Many states already place limitations on the enforceability of non-compete provisions (including compensation thresholds and notice requirements, among other employee protections). Renewed attention to these limitations, as well as strong confidentiality and non-solicitation provisions, remain central components of an employer’s protection of its competitive position.
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