On August 20, Judge Ada Brown advanced her August 30, 2024, deadline and ordered the end of the Federal Trade Commission’s (“FTC”) non-compete rule enforcement, providing relief to employers nationwide.
 

Judge Brown, of the Northern District of Texas, evaluated competing motions for summary judgment filed by the plaintiff, the related parties, and the FTC. She denied the FTC’s motion and granted the plaintiffs’ motions. In reaching her decision, Judge Brown concluded that the FTC exceeded its statutory authority derived from the Federal Trade Commission Act when it issued the non-compete rule earlier this year, and acted in an arbitrary and capricious manner in violation of the Administrative Procedures Act (“APA”).

Judge Brown concluded that the Federal Trade Commission Act provided a limited role for making “housekeeping” rules to preclude unfair and deceptive practices, and as a result, the FTC lacks the authority to create substantive rules, such as the non-compete rule, that it promulgated.

In addition, Judge Brown concluded that the record underlying the non-compete rule did not support the non-compete rule and was an arbitrary and capricious exercise of rulemaking. She ruled that the non-compete rule “is based on inconsistent and flawed empirical evidence, fails to consider the positive benefits of non-compete agreements, and disregards the substantial body of evidence supporting these agreements.” Judge Brown also faulted the FTC’s failure to sufficiently consider alternatives to the non-compete rule that it published.

Because the non-compete rule exceeded the FTC’s statutory authority and was arbitrary and capricious, Judge Brown held that she was required to set the non-compete rule aside and order, on a nationwide basis, that the non-compete rule would not take effect on September 4, 2024, and may not be enforced.

Many practitioners expect that the FTC will attempt to appeal the ruling to the Fifth Circuit Court of Appeals, especially in light of last month's conflicting ruling by the Eastern District of Pennsylvania in ATS Tree Services, LLC v. Federal Trade Commission. Contrary to Judge Brown’s rulings, the Pennsylvania district court denied the plaintiff’s motion to enjoin and stay the FTC’s non-compete rule. The Pennsylvania district court held that the employer failed to demonstrate that the non-compete rule would cause irreparable harm or that the employer was likely to succeed on the merits. The FTC may use the ATS Tree Service decision in an effort to overturn Judge Brown’s injunction before the Fifth Circuit.

The Takeaway

For the time being, the FTC non-compete rule banning non-compete agreements nationwide is blocked. Employers utilizing non-compete agreements with their employees need to focus instead on state law protections for employees, including states like California that ban non-compete agreements in the employment context.

This article first appeared here.

Author Bio

Dan M. Forman is a Co-Managing Partner and Chair of the Unfair Competition & Trade Secret Practice Group at CDF Labor Law LLP.

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