On August 20, 2024, Judge Ada Brown of the U.S. District Court for the Northern District of Texas permanently enjoined the U.S. Federal Trade Commission’s (FTC) rule prohibiting employers from using or enforcing noncompete agreements with their workers. In the opinion accompanying her August 20 order, Judge Brown found that the plaintiffs in Ryan LLC v. FTC were entitled to summary judgment because (1) the FTC exceeded its statutory authority in implementing the FTC Rule; and (2) the FTC Rule is arbitrary and capricious.
Judge Brown had already signaled she was likely to block the noncompete ban that would otherwise have gone into effect on September 4, 2024. On July 3, 2024, she granted a preliminary injunction that only covered the plaintiffs in the Ryan LLC lawsuit, but at that time she declined to either enter a nationwide injunction or to stay the FTC Rule for all employers. The August 20 order now blocks implementation or enforcement of the FTC Rule for all employers across the country.
The FTC Rule
The FTC Rule would prohibit employers from entering or enforcing noncompete clauses with U.S. workers, with only limited exceptions. The FTC Rule was unprecedented because this issue has never been comprehensively regulated by the federal government and has instead been left to the states to address. The FTC Rule would also have invalidated most existing noncompete agreements and would have required companies to provide notice to current and former employees that such agreements are invalid by or before September 4. The FTC has not yet indicated whether it plans to appeal Judge Brown’s decision.
Judge Brown’s Ban on the FTC Rule
In Ryan LLC, the plaintiff filed suit to prevent the implementation and enforcement of the FTC Rule. The U.S. Chamber of Commerce, Business Roundtable, Texas Association of Business, and Longview Chamber of Commerce intervened to join Ryan LLC as plaintiffs. After Judge Brown granted the plaintiffs’ preliminary injunction motion as to the named plaintiffs on July 3, the plaintiffs moved for summary judgment and the FTC filed a cross-motion for summary judgment.
Judge Brown granted the plaintiffs’ motion for summary judgment, effectively setting aside the FTC Rule and concluding that the FTC Rule “shall not be enforced or otherwise take effect on its effective date of September 4, 2024, or thereafter.” Judge Brown reasoned that the FTC exceeded its statutory authority in promulgating the FTC Rule because the FTC “lacks substantive rulemaking authority with respect to unfair methods of competition.” Judge Brown’s ruling that the FTC does not have authority to promulgate substantive rules “with respect to unfair methods of competition” is also a setback for the FTC for any future rulemaking plans.
She also concluded that the FTC Rule is arbitrary and capricious because (1) it is unreasonably overbroad without a reasonable explanation for the lack of specificity; (2) it is based on inconsistent and flawed empirical evidence, failed to consider the positive benefits of noncompete agreements, and disregarded the substantial body of evidence supporting noncompete agreements; and (3) the FTC failed to sufficiently address alternatives to issuing the sweeping noncompete ban contained in the FTC Rule. In addressing the appropriate remedy, the court concluded that setting aside agency action like the FTC Rule has “nationwide effect” and “affects persons in all judicial districts equally.”
Looking Forward
Employers that use noncompete agreements in the workforce should rest assured that the FTC Rule will not go into effect on September 4. While the FTC may appeal the decision, it may face a skeptical reception before the conservative Fifth Circuit Court of Appeals. However, Ryan LLC is only one of three lawsuits challenging the FTC Rule—and a court in the Eastern District of Pennsylvania (ATS Tree Services LLC v. The Federal Trade Commission) sided with the FTC, upholding the FTC’s procedural and substantive authority to issue the rule. It is possible that a potential circuit split could eventually prime this issue for review by the U.S. Supreme Court. Since Judge Brown’s August 20 decision may not be the final word on the viability of the FTC Rule, we will continue to monitor additional litigation developments in these cases.
Despite Judge Brown’s ruling setting aside the FTC Rule, her decision does not prevent the FTC from addressing noncompetes through case-by-case enforcement actions. For that reason, we recommend that employers seek the advice of their counsel if they receive notice that the FTC has opened an investigation into the use of noncompete agreements in their workforce. Finally, companies that employ individuals in states that prohibit or limit the scope of permissible noncompete agreements must still comply with those state laws.
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