On August 20, a federal judge in Texas struck down the Federal Trade Commission’s (FTC) looming rule banning noncompete agreements for virtually all U.S. workers.
The rule, which was announced in April and set to take effect on September 4, was immediately challenged by a flurry of litigation. One of those cases was Ryan LLC vs. Federal Trade Commission, filed in the Northern District of Texas and assigned to Trump appointee Judge Ada Brown. The U.S. Chamber of Commerce and other business groups filed a separate lawsuit in Texas, which was later joined with the Ryan litigation.
On July 3, Judge Brown granted the motion for preliminary injunction filed by the plaintiff and plaintiff-intervenors, finding that the FTC lacked the authority to issue the rule and temporarily enjoining its enforcement, but that ruling was limited to the parties, leaving the rule intact for all other employers. This left employers in a state of uncertainty, with the judge promising a final ruling by August 30, just days before the rule was to take effect. Adding to the confusion, on July 23, a Pennsylvania federal court sided with the FTC, and on August 14, a federal court in Florida ruled that the FTC likely did not have the power to ban noncompete agreements, but that court relied on a different legal theory than the Texas court and issued an injunction that also only applied to the plaintiffs in that case. As the deadline approached for the rule to take effect, employers remained in limbo.
But now the wait is now over. On August 20, Judge Brown granted the motion for summary judgment filed by the plaintiff and plaintiff-intervenors in the Ryan case and held that the FTC noncompete rule is invalid. The court not only found that the FTC lacks the statutory authority to promulgate the rule, but also determined that “the Commission’s lack of evidence as to why they chose to impose such a sweeping prohibition – that prohibits enforcing virtually all non-competes – instead of targeting specific, harmful non-competes, renders the Rule arbitrary and capricious.”
Based upon those findings, Judge Brown held that the appropriate remedy under the Administrative Procedure Act (APA) was to set aside the rule. The FTC argued that the relief should be limited to the named plaintiffs, but Judge Brown rejected that argument, finding that “the APA does not contemplate party-specific relief.” She cited precedent from the U.S. Court of Appeals for the Fifth Circuit that setting aside agency action under the APA has “nationwide effect,” is “not party-restricted,” and “affects persons in all judicial districts equally.” With that, the FTC’s noncompete rule has been stifled – at least for the moment.
The FTC is expected to appeal Judge Brown’s ruling. Because the federal judge in Pennsylvania upheld the rule last month in a similar case, the stage is set for a continued fight that will likely end at the U.S. Supreme Court.
The bottom line for employers is that the nationwide ban is off the table, but noncompetes remain subject to attack and are becoming more limited in a variety of jurisdictions, with legislation pending in many states. This reprieve is an opportunity for employers to examine the policies and agreements they have in place, as we anticipate ongoing changes and challenges.
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