Federal Court Blocks the FTC's Non-Compete Clause Rule from Taking Nationwide Effect

This summer we have been documenting the legal saga of the Federal Trade Commission’s (FTC) recently issued Non-Compete Clause Rule (the “Final Rule”). The Final Rule would make it a violation of Section 5 of the FTC Act for businesses to enter into non-compete clauses with their employees stating it is an unfair method of competition. As we expected, a Texas Federal Court has blocked the Final Rule from taking effect nationwide.[1]  

Previously, on July 3, 2024, the Northern District of Texas preliminarily enjoined implementation and enforcement of the Final Rule as to the named plaintiffs finding that: (i) the FTC exceeded its statutory authority; (ii) the Final Rule is arbitrary and capricious; and (iii) that the Final Rule would cause irreparable harm to the plaintiffs (the “Ryan Litigation”).[2] After the District Court denied plaintiffs’ request to expand the scope of injunctive relief nationwide, both parties moved for summary judgment.

On August 20, 2024, the Northern District of Texas granted summary judgment in favor of the plaintiffs holding that the Final Rule shall be “set aside and shall not be enforced or otherwise take effect.”[3] The Court addressed the plaintiffs' arguments that the FTC’s promulgation of the Final Rule was unlawful because: (i) the FTC acted without statutory authority; (ii) the Final Rule was a product of an unconstitutional exercise of power; and (iii) the FTC’s acts, findings, and conclusions were arbitrary and capricious.[4]

The Court also considered the FTC’s arguments that it was entitled to summary judgment because: (i) Congress authorized the FTC in clear language to prevent unfair competition; (ii) the major questions doctrine was not implicated because the Final Rule was within the FTC’s delegated authority; (iii) the Sherman Act is inapplicable; (iv) the FTC Act provided an intelligible principle by which the Final Rule can be measured; (v) the Final Rule is not unlawfully retroactive; (vi) the challenge is foreclosed by binding precedent; and (vii) the FTC’s exhaustive studies of non-competes satisfied the deferential arbitrary-and-capricious standard.[5]

Ultimately, the Court stated that the “issue presented is whether the FTC’s ability to promulgate rules concerning unfair methods of competition include the authority to create substantive rules regarding unfair methods of competition.”[6] The Act reads in pertinent part:

The Commission is hereby empowered and directed to prevent persons, partnerships, or corporations . . . from using unfair methods of competition in or affecting commerce and unfair or deceptive acts or practices in or affecting commerce.[7]

Further, pursuant to Section 6(g) of the Act, the FTC has the power to “classify corporations and (except as provided in section 57a(a)(2) of this title) to make rules and regulations for the purpose of carrying out the provisions of this subchapter.”[8]

First, the Court analyzed the text, structure, and history of the above language. Here, the Court stated that a “plain reading… of the Act does not expressly grant the Commission authority to promulgate substantive rules regarding unfair methods of competition.”[9] Additionally, the Court noted that the Act’s absence of a statutory penalty was further evidence that provision was meant to be interpreted to “encompass[] only interpretive or procedural rules.”[10] The Court noted that Section 6(g) was encompassed in a larger list of “almost entirely investigative powers.”[11] Finally, the Court outlined the history of the FTC’s power to issue such rules and found that since 1978 to the announcement of the Final Rule “the Commission did not promulgate a single substantive rule under Section 6(g).”[12]

Next, the Court held that the FTC’s promulgation of the Final Rule was “arbitrary and capricious because it [was] unreasonably overbroad without a reasonable explanation.”[13] The Court found the Final Rule was an attempt at a one-size-fits-all-solution despite the FTC’s evidentiary studies showing different State’s approaches to “enforcing non-competes based on specific factual situations—completely inapposite to the Rule’s imposition of a categorical ban.”[14] Further, the Court found that the FTC did not “sufficiently address alternatives to issuing the Rule.”[15]

Finally, the Court addressed the proper remedy, based on its holding, under the Administrative Procedure Act (“APA”). The Court stated the APA “directs” them to “hold unlawful and set aside agency action” that is arbitrary and capricious.[16] The Court found that this relief should have a nationwide effect and not be restricted to the parties in the litigation.[17]  Thus, the Court held that the Final Rule was unlawful and set it aside.[18]

Next, the FTC would have to appeal to the Fifth Circuit Court of Appeals, who – based on history – seems likely to affirm the decision. It is likely that the United States Supreme Court will address this issue at some point in the future because a Pennsylvania Federal Court denied injunctive relief to separate plaintiffs, likely leading to a future circuit split on the merits of the FTC’s ability to promulgate the Final Rule. At this point, employers may maintain the status quo with respect to their agreements with employees.

We will continue to update employers on the appellate proceedings related to the Final Rule.

[1] Ryan, LLC, v. Fed. Trade Comm’n, No. 3:24-cv-986 (N.D. Tex. Aug. 20, 2024).
[2] Ryan, LLC, v. Fed. Trade Comm’n, No. 3:24-cv-986 (N.D. Tex. July 3, 2024).
[3] Ryan, LLC, v. Fed. Trade Comm’n, No. 3:24-cv-986, at *27 (N.D. Tex. Aug. 20, 2024) (cleaned up).
[4] Id. at *8.
[5] Id. at *13-*14.
[6] Id. at *16 (emphasis within).
[7] Id. (citing to 15 U.S.C. § 45(a)(2)).
[8] Id.
[9] Id. 
[10] Id. at *18 (internal citations omitted).
[11] Id. at *18-*19.
[12] Id. at *20.
[13] Id. at *24.
[14] Id.
[15] Id. at *25.
[16] Id. at *26.
[17] Id.
[18] Id. at *27.