With Effective Date Fast Approaching, the FTC’s Noncompete Ban Is Set Aside

Judge Ada E. Brown Grants Summary Judgment in Favor of Ryan, LLC – Holding Unlawful and Setting Aside the FTC’s Noncompete Rule

In a decision on Aug. 20 impacting employers and employees nationwide, the U.S. District Court for the Northern District of Texas granted Plaintiff Ryan LLC’s motion for summary judgment, setting aside the FTC’s Noncompete Rule and prohibiting the FTC’s enforcement of the Rule that was scheduled to take effect Sept. 4, 2024.

In a 27-page opinion, the Court concluded that the FTC exceeded its statutory authority in issuing the Rule and the Noncompete Rule was arbitrary and capricious.

The FTC adopted the final Noncompete Rule on April 23, 2024, which:

• Prohibits employers from entering into noncompete agreements with employees
• Requires employers to advise employees on or before Sept. 4 that their noncompete agreements will be unenforceable as of that date
• Requires employers to rescind noncompete clauses for most employees

The rule contains only limited exceptions.

With respect to whether the FTC has the statutory authority to issue the Noncompete Rule, the Court concluded that neither the text nor structure of Section 6(g) of the FTC Act (which empowers the FTC to “classify corporations [and with limited exceptions] to make rules and regulations …”) grant the FTC authority to promulgate substantive rules (as opposed to “housekeeping” rules) regarding unfair methods of competition. Among other things, the Court noted with regard to Section 6(g) that the lack of a penalty provision indicates that Congress did not provide the FTC with substantive rulemaking authority. Accordingly, it determined the FTC exceeded its statutory authority.  

The Court also found that the Noncompete Rule was arbitrary and capricious because it was “unreasonably overbroad without a reasonable explanation.” The Court took issue with its “one-size-fits-all approach,” determining the rule was based on inconsistent and flawed evidence and failed to adequately address less disruptive alternatives and exceptions.

Finding that the Noncompete Rule was both in excess of statutory authority and arbitrary and capricious, the Court held that the Rule is unlawful and set it aside.

Importantly, this decision has a nationwide effect, equally impacting all persons, corporations and employers. Employers may therefore refrain from complying with the Noncompete Rule until further notice. We anticipate that this decision will be appealed to the Fifth Circuit.  

It is important to note that the Noncompete Rule would not apply to entities outside the jurisdiction of the FTC. The jurisdiction of the FTC does not include entities that are not organized to carry on business for their own profit or that of their members.

We will continue to monitor this and other related employment and labor law developments. For questions regarding how this will affect your business, please contact Lisa M. Scidurlo, Michael G. Tierce, Charles Honart or the Stevens & Lee attorney with whom you regularly work.