Texas Federal Court Sets Aside the FTC Non-Compete Rule Nationwide

What the rule would have done

The FTC announced the rule on 23 April 2024 by a 3 to 2 vote. It would have banned new non-compete clauses for workers nationwide, treating them as an unfair method of competition, and made most existing non-competes unenforceable after the effective date. Existing agreements with senior executives, defined as workers in policy-making positions earning more than $151,164 a year, could have remained in force. The FTC estimated that around 30 million workers, about one in five Americans, are bound by a non-compete.

Why the court set it aside

The court held that Section 6(g) of the FTC Act does not authorise substantive rulemaking on unfair methods of competition, and that the rule therefore exceeded the agency's authority. It also found the rule arbitrary and capricious under the Administrative Procedure Act, describing it as a categorical ban that was unreasonably overbroad without adequate explanation. The court noted that the FTC had not sufficiently justified a blanket prohibition over narrower measures, or adequately considered alternatives.

The court granted summary judgment to the plaintiffs and held that its order setting the rule aside has nationwide effect and is not limited to the parties. It had previously granted a preliminary injunction limited to the named plaintiffs on 3 July 2024.

What it means for employers

With the rule set aside, the federal ban will not take effect on 4 September and employers are not required to send the notices it would have required. Non-compete clauses remain subject to state law and to case by case enforcement. Any appeal by the FTC would go to the Fifth Circuit.

Sources

• US District Court for the Northern District of Texas (via FindLaw): Ryan, LLC v Federal Trade Commission, Memorandum Opinion and Order
• Federal Trade Commission: FTC Announces Rule Banning Noncompetes