Federal Court Strikes Down FTC’s Noncompete Rule: What It Means for Businesses

A federal court has blocked the Federal Trade Commission’s (FTC) new non-compete rule, allowing businesses to pause their compliance efforts. For now, there is no obligation for companies to issue notices about the unenforceability of non-compete terms or to modify their use in future employment contracts.

On August 20, 2024, Judge Ada Brown of the Northern District of Texas granted summary judgment in favor of plaintiffs challenging the FTC’s proposed rule that would have rendered most non-compete agreements unenforceable. In a prior order on July 3, 2024, Judge Brown had granted a preliminary injunction temporarily preventing the FTC from enforcing the rule against the named plaintiffs (for our analysis of the July 3 decision, click here). In her August 20 decision, Judge Brown ruled on the merits, determining that (1) Congress did not authorize the FTC to issue substantive rules of general application under its authority to regulate “unfair methods of competition;” and (2) the FTC’s process in developing and proposing the non-compete rule was arbitrary and capricious. Notably, unlike her earlier injunction, Judge Brown’s summary judgment applies nationwide, preventing the rule from being enforced or taking effect anywhere in the U.S.

While Judge Brown’s decision does not directly conflict with a recent ruling by a Pennsylvania federal judge who declined to issue a preliminary injunction in a similar challenge to the FTC rule, her nationwide ruling sets the stage for a broader legal battle over the rule that is likely to unfold in federal appellate courts in the coming months.

Judge Brown’s reasoning in the August 20 decision closely mirrored her analysis from the July preliminary injunction ruling, where she concluded that the plaintiffs were likely to succeed on the merits at trial. She found that Congress had not granted the FTC authority under the Federal Trade Commission Act to create substantive rules of general application for regulating “unfair methods of competition.” Instead, she interpreted the relevant statutory provision as only permitting the issuance of “housekeeping rules” or “rules of agency organization, procedure, or practice.” Judge Brown also rejected the FTC’s argument that its issuance of a few substantive rules in the 1960s and 1970s, along with subsequent amendments to the FTC Act, indicated congressional intent to grant the FTC substantive rulemaking authority in this area…

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