FTC Non-Compete Rule Struck Down

on August 20, 2024, U.S. District Judge Ada Brown of the Northern District of Texas set aside the FTC’s rule prohibiting non-compete clauses. This rule was scheduled to take effect on September 4.

Judge Brown found that “the text and the structure of the FTC Act reveal the FTC lacks substantive rulemaking authority with respect to unfair methods of competition” and that “the rule is arbitrary and capricious because it is unreasonably overbroad without a reasonable explanation.”

This ruling was issued in a case filed by Dallas-based tax firm, Ryan LLC, against the FTC just moments after the FTC announced its new rule on April 23, 2024. The U.S. Chamber of Commerce filed a similar lawsuit a day later in the U.S. District Court for the Eastern District of Texas, but intervened in Ryan LLC’s lawsuit after the EDTX court stayed the Chamber’s case.

On July 3, 2024, Judge Brown granted a limited preliminary injunction staying the enforcement of the FTC rule. The ruling on August 20 permanently set aside the FTC's rule. As the Fifth Circuit stated in a couple of recent cases that setting aside an agency action under Section 706 has a “nationwide effect,” is not “party restricted,” and “affects persons in all judicial districts equally,” Judge Brown's ruling is nationwide in effect.

FJ Employment Lawyer, Heather Kramer, believes that "the FTC will appeal the ruling, but for now, employers are permitted to enter into and enforce existing non-competes to the extent they are otherwise legal and enforceable." It is widely believed that the Fifth Circuit will not look favorably on this FTC non-compete rule.

For more inquiries about non-compete clauses or other employment law issues, please contact Heather Kramer.