Texas Court Finds FTC Noncompete Ban Unlawful with Nationwide Effect

On Tuesday, August 20, 2024, a federal judge in Texas issued an order finding unlawful – and prohibiting the enforcement of – a rule issued by the Federal Trade Commission (the “FTC”) that prohibited the use of most noncompetition agreements (the “Noncompete Rule”).  The Noncompete Rule, which Goodwin first summarized here, was scheduled to take effect September 4, 2024.  The order has nationwide effect.

Specifically, in Ryan, LLC v. Federal Trade Commission, the United States District Court for the Northern District of Texas ruled that the FTC issued the Noncompete Rule in excess of its statutory authority and that the Noncompete Rule is arbitrary and capricious.  As a result, the court found the Noncompete Rule unlawful and, thus, unenforceable.  Importantly, the court expressly held that its ruling has nationwide effect, refusing to limit its relief to the named plaintiffs as it had earlier done in a preliminary stage of the case, when it temporarily enjoined the enforcement of the Noncompete Rule only against those plaintiffs.  At least for now, all employers are excused from any obligation they may have had to comply with the Noncompete Rule.

The Court’s Decision

After the Ryan court issued its preliminary injunction on July 3, 2024, which Goodwin summarized here, the court set an expedited briefing schedule pursuant to which the Ryan plaintiffs and the FTC each filed motions for summary judgment.  The issues before the court were (1) whether the Noncompete Rule exceeded the FTC’s statutory authority bestowed upon it by the Federal Trade Commission Act (the “FTC Act”), (2) whether the Noncompete Rule was arbitrary and capricious and (3) whether the Noncompete Rule was unconstitutional.

First, the court concluded that the text and the structure of the FTC Act did not grant the FTC the statutory authority to engage in substantive rulemaking authority with respect to unfair methods of competition such that the court found the FTC exceeded its statutory authority in issuing the Noncompete Rule.  Important to this conclusion was the court’s acknowledgement that it was no longer required to defer to an agency’s interpretation of a congressional statute, after the Supreme Court of the United States rejected “Chevron deference” in its June 28, 2024, decision in Loper Bright Enterprises v. Raimondo. Goodwin discussed the Loper Bright decision and its implications here.

Second, the court concluded that the Noncompete Rule was arbitrary and capricious because it was unreasonably overbroad without a reasonable explanation for its breadth.  Specifically, the court held that the Noncompete Rule’s “one-size-fits-all approach with no end date” was not supported by the record.  Particularly relevant to the court was its findings that the FTC only relied on a handful of studies in examining the economic effects of noncompetition agreements, that no state had yet enacted a noncompetition rule as broad as the FTC Rule and that the FTC failed to sufficiently address alternatives to issuing the Noncompete Rule, such as differentiated approaches applicable to different classes of workers.

Having determined that the FTC lacked the statutory authority to issue the Noncompete Rule and that the Noncompete Rule was arbitrary and capricious, the court chose not to address the argument that the Noncompete Rule was unconstitutional.  Based on its conclusions, the court found that, pursuant to Section 706 of the Administrative Procedure Act, it must “hold unlawful” and “set aside” the Noncompete Rule.  The court declined to limit this ruling to the Ryan plaintiffs, individually, and, instead, stated that its order should have “nationwide effect,” relying on Fifth Circuit precedent that decisions to set aside agency actions pursuant to Section 706 should not be “party-restricted” and should “affect() persons in all judicial districts equally.”

Potential Legal Next Steps

The court’s ruling represents the latest development in the legal challenges to which the Noncompete Rule has been subject since its promulgation.  Goodwin summarized some of these challenges here, after the court issued its preliminary injunction in Ryan.

Since that preliminary injunction, on July 23, 2024, in ATS Tree Services, LLC v. Federal Trade Commission, the United States District Court for the Eastern District of Pennsylvania declined to temporarily enjoin enforcement of the Noncompete Rule, finding, unlike in Ryan, that the FTC had substantive authority under the FTC Act to make the Noncompete Rule.  Then, on August 14, 2024, the United States District Court for the Middle District of Florida, in Properties of the Villages, Inc. v. Federal Trade Commission, entered a temporary injunction prohibiting the enforcement of the Noncompete Rule, but the injunction was limited to the named plaintiff.

Importantly, neither ATS nor Properties of the Villages is a decision on the merits. Currently, Ryan is the only case in which a court has ruled on the merits with respect to the Noncompete Rule.  The FTC may elect to appeal the court’s decision in Ryan such that the lawfulness of the Noncompete Rule may eventually be evaluated by the Supreme Court.  Nevertheless, unless the Ryan decision is reversed through the appellate process, given the express nationwide scope of the court’s decision in Ryan, all employers may rely on Ryan in not complying with the Noncompete Rule.

What This Means for Employers

The various legal challenges to the Noncompete Rule, and the procedural nature of those challenges, created great uncertainty for employers with respect to their use and enforcement of noncompetition agreements, including whether they should prepare to comply with the Noncompete Rule in advance of its September 4 effective date.

Because of Ryan, there is some certainty, at least for now.  Since the Noncompete Rule will not go into effect on September 4, employers nationwide can continue to use and enforce noncompetition agreements and do not need to make plans to comply with the Noncompete Rule at this point.

Notwithstanding Ryan and its conclusion that the Noncompete Rule is unlawful, noncompetition agreements remain subject to significant limitations under state law.  Indeed, in certain states, the use of noncompetition agreements already is unlawful or limited by statute.  In other states, case law provides parameters as to the lawful scope of noncompetition agreements.  Employers should continue to tailor their noncompetition agreements to the laws of the states in which they operate and/or their employees reside.  Given the continued uncertainties associated with enforcing noncompetition agreements, employers should also consider alternative methods for protecting their confidential information and goodwill.

The members of Goodwin’s Employment and Antitrust Practices are ready and available to work with clients to determine whether their current noncompetition agreements are enforceable under applicable state law and to advise on any evolving merits decisions and appeals thereof with respect to the Noncompete Rule, including appeals to the Supreme Court.

 

This informational piece, which may be considered advertising under the ethical rules of certain jurisdictions, is provided on the understanding that it does not constitute the rendering of legal advice or other professional advice by Goodwin or its lawyers. Prior results do not guarantee a similar outcome.