Federal Judge Sets Aside FTC's Ban of Non-Compete Clauses

On August 20, 2024, United States District Judge Ada Brown of the Northern District of Texas set aside the FTC Non-Compete Clause Rule, adding that the rule shall not be enforced or otherwise take effect on or after September 4, 2024, which was its scheduled effective date. Judge Brown made clear that her setting aside the FTC's rule has "nationwide effect," was "not party-restricted," and "affects persons in all judicial districts equally."

What led to the ruling?

In a prior ruling, Judge Brown had granted a preliminary injunction against the FTC's enforcement of the non-compete rule against the particular plaintiffs in the suit. In this ruling, Judge Brown found that the FTC lacked statutory authority to promulgate the non-compete rule and that the non-compete rule is arbitrary and capricious. Consequently, Judge Brown granted the plaintiffs' motion for summary judgment, opining that, as a result of the foregoing findings, the Administrative Procedure Act required the court to hold that the FTC's non-compete rule is unlawful and to set it aside.

Judge Brown held that the FTC exceeded its statutory authority in promulgating the rule because she concluded the FTC lacks substantive rulemaking authority with respect to unfair methods of competition. Judge Brown held that the FTC's rule was arbitrary and capricious primarily because she concluded it was unreasonably overbroad without a reasonable explanation.

What's next?

The FTC may appeal this ruling, but as of now and for the immediate future, there is no nationwide ban of non-compete clauses, nor are employers required to give notices to their employees regarding non-compete clauses by September 4, 2024. The attorneys here at Stone Pigman are following the latest developments and expect to provide an update in the future should the rule be held lawful on appeal.