Client Alert: Texas Court Sets Aside FTC’s Non-Compete Rule
On August 20, 2024, a Texas federal court ruled that the Federal Trade Commission’s recently announced Non-Compete Rule, which was set to go into effect on September 4, 2024, is an unlawful agency action and prohibited its enforcement nationwide.
More information on the FTC’s new rule is available below. Please reach out to Malcolm Heinicke, Carolyn Luedtke, Miriam Kim, Bethany Kristovich and Laura Smolowe to learn more.
The Non-Compete Rule and Subsequent Litigation
On April 23, 2024, the Federal Trade Commission (FTC) voted to adopt a final rule regarding non-competition agreements. The Rule prohibited the enforcement of many existing non-competition agreements for workers other than senior executives and prohibited new non-competition agreements in most circumstances, including for senior executives.
On the same day the rule was announced, tax services firm Ryan LLC sued the FTC in the Northern District of Texas to vacate the new rule. The Chamber of Commerce of the United States of America, Business Roundtable, Texas Association of Business, and Longview Chamber of Commerce joined that lawsuit as plaintiffs.
The plaintiffs sought, and in early July received, a preliminary injunction prohibiting the FTC from enforcing the Rule, but that injunction applied only to the plaintiffs in that lawsuit. Both the plaintiffs and the FTC later filed cross-motions for summary judgment on the permissibility of the Non-Compete Rule.
The Ruling and Its Implications
On August 20, 2024, Judge Ada E. Brown issued an order granting the plaintiffs’ motion for summary judgment and setting the Non-Compete Rule aside as unlawful.
The court concluded that the FTC “exceeded its statutory authority in promulgating the Non-Compete Rule” and that the Rule was “unreasonably overbroad” and “arbitrary and capricious.” It ordered that “[t]he Rule shall not be enforced or otherwise take effect on its effective date of September 4, 2024, or thereafter.” The court specified that this order is not “limited to the named Plaintiffs” but rather “has ‘nationwide effect.’”
Yesterday’s order prevents the rule’s broader provisions from going into effect, unless or until a reviewing court reaches a contrary conclusion. The FTC is reportedly “seriously considering a potential appeal,” and a spokesperson for the agency noted that “today’s decision does not prevent the F.T.C. from addressing noncompetes through case-by-case enforcement actions.”