U.S. District Court Rejects FTC Rule Banning Non-Compete Agreements

The U.S. District Court of Northern Texas issued a final judgment in a case challenging the Federal Trade Commission’s (the “FTC”) new rule banning employment related non-compete clauses. The August 20, 2024, ruling was issued in a suit brought by the Chamber of Commerce of the United States of America, among other co-plaintiffs, against the FTC and strikes down the FTC’s recently issued rule prohibiting non-compete clauses (the “Rule”). The Rule was set to go into effect on September 4, 2024, but the court’s decision makes the Rule no longer enforceable.

Why Was the Rule Overturned? 

Judge Ada Brown concluded that the Rule violated federal law because (i) it exceeds the FTC’s statutory authority and (ii) it is arbitrary and capricious. Judge Brown agreed with the plaintiffs’ assertion that the Federal Trade Commission Act does not authorize the FTC to issue substantive unfair-competition rules and by issuing such a rule it has exceed the authority granted to the FTC by Congress. Judge Brown’s opinion also noted that the Rule is arbitrary and capricious because it is unreasonably overbroad, and the FTC failed to provide a reasonable explanation for why the rule is needed.

Next Steps

The FTC may appeal the decision to the Fifth Circuit Court of Appeals in an effort to reinstate the Rule, and many media outlets have reported the FTC is strongly considering filing such an appeal. It is very unlikely an appeal or a court ordered stay of the district court’s ruling would occur any time soon. Ultimately, the ruling may go before the United States Supreme Court. The FTC may also attempt to redraft the Rule in a form more narrow in scope.

One immediate outcome is clear, at this time businesses no longer need to comply with the Rule’s requirement to provide notice to current or former employees (who are subject to a non-compete clause), that the non-compete is no longer enforceable.

New Developments  

Rudolph Friedmann LLP will provide further information on the enforceability of the FTC’s Rule as it becomes available. Should you have any questions regarding your company’s non-compete agreements or other restrictive covenant agreements such as non-solicitation or non-disclosure clauses, please contact the attorneys at Rudolph Friedmann LLP.