Texas District Court Strikes Down the FTC’s Rule Banning Most Non-Compete Agreements

On August 20, 2024, the United States District Court for the Northern District of Texas, in the case of Ryan LLC et al v. Federal Trade Commission, invalidated the Federal Trade Commission’s (FTC) rule that would have prohibited most non-compete agreements. 

The court’s ruling, which has nationwide implications, effectively halted the FTC’s rule from coming into effect as scheduled on September 4, 2024. This decision means that existing non-compete agreements may remain valid and enforceable where permitted by applicable laws, and new ones may be entered into.

The legal challenge began on April 23, 2024, by Ryan, LLC, who argued that the FTC lacked the necessary rulemaking authority under the Federal Trade Commission Act. The lawsuit also contended that the rule stemmed from an unconstitutional exercise of power and that the FTC’s actions and findings were arbitrary and capricious. Several parties, including the U.S. Chamber of Commerce, also joined as intervening plaintiffs.

In its analysis, the court first examined the FTC’s statutory rulemaking authority. It concluded that the FTC Act does not explicitly grant the Commission the power to create substantive rules. The court interpreted the Act’s rulemaking provisions as limited to “housekeeping” type regulations, stating that “the text and the structure of the FTC Act reveal the FTC lacks substantive rulemaking authority with respect to unfair methods of competition.”

Furthermore, the court found the rule and its promulgation process to be arbitrary and capricious. It expressed skepticism about the studies and evidence the FTC relied upon, determining that the Commission failed to demonstrate a rational basis for imposing such a sweeping rule. The court also criticized the FTC for not adequately considering less disruptive alternatives to its near-total ban on non-compete agreements.

In light of this ruling, the existing legal landscape governing non-compete agreements will remain in place, barring any reversal or stay from a higher court (an appeal by the FTC is expected). It’s important for employers to keep in mind that while the FTC (federal) ban has been invalidated, state laws that ban or otherwise limit non-competes are not affected by the court’s ruling.