FTC Ban on Non-Competes Struck Down By Federal Judge

There has been a significant development in the legal battle surrounding the U.S. Federal Trade Commission’s non-competition rule, which effectively prohibits any person or business from entering into or enforcing non-compete agreements. The United States District Court for the Northern District of Texas found that the FTC’s rule exceeded the Commission’s statutory authority and was arbitrary and capricious. As a result, the court held that the rule was unlawful and set it aside. The decision is not limited to the named parties and instead has “nationwide effect.” The FTC’s rule, according to the court, “shall not be enforced or otherwise take effect on its effective date of September 4, 2024, or thereafter.”

In the ruling, the court examined the text, structure, and history of the Federal Trade Commission Act (the “Act”) and concluded that the FTC lacked the statutory authority to broadly ban practices it considers to be “unfair methods of competition” by adopting substantive rules like the Commission’s rule banning non-competition agreements. The court also held that even if the FTC had the power to adopt the rule, the Commission had not justified banning virtually all noncompete agreements: “The Commission’s lack of evidence as to why they chose to impose such a sweeping prohibition—that prohibits entering or enforcing virtually all non-competes—instead of targeting specific, harmful non-competes, renders the Rule arbitrary and capricious.”

This decision follows a July 23, 2024, decision by the United States District Court for the Eastern District of Pennsylvania, which held that the FTC had the statutory authority under the Act to ban most non-competition agreements, and therefore, upheld the rule. It also follows an August 14, 2024, decision by the United States District Court for the Middle District of Florida, which held that the FTC did not have the statutory authority to issue its rule, but this decision was limited only to the employer that brought suit.

The FTC approved the ban on noncompete agreements in a 3-2 vote in May. The FTC and supporters of the rule say that the agreements are an unfair restraint on competition that violates the Act and suppresses workers’ wages and mobility. About 30 million people, or 20% of U.S. workers, have signed non-competes, according to the FTC.

The Northern District of Texas court temporarily blocked the rule in July for a small number of employers while it considered a bid to strike the rule down entirely brought by Ryan LLC, a tax services firm, and supported by the U.S. Chamber of Commerce, the country’s largest business lobby, and several other industry groups. The plaintiffs challenged the FTC’s authority to issue the rule, claiming the ban would impose an extraordinary burden on business owners seeking to protect their proprietary information, customer goodwill, and intellectual property and to retain talent within the professional services industry.  Several notable outside parties on both sides of the non-compete rule filed briefs outlining either their opposition to or support of the rule. 

FTC spokesperson Victoria Graham said the agency is “seriously considering an appeal,” which we expect the FTC will pursue in the coming days. So, while this decision is a material development, it is likely not the last word on the enforceability of the FTC’s rule.

If you would like to learn more about this ruling and its implications for employers and employees, please contact Jodyann Galvin (716.848.1520) or John Godwin (716.848.1357).

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