Federal Trade Commission Noncompete Rule Halted by Texas Federal Court

In a major development, on Aug. 20, 2024, a Texas federal court halted the Federal Trade Commission’s new noncompete agreement rule from taking effect. The FTC rule was scheduled to go into effect on Sept. 4, 2024, but the court’s order indefinitely sets it aside and prohibits the FTC from enforcing it nationwide. 

In Judge Ada E. Brown’s opinion in Ryan LLC v. Federal Trade Commission, she explained that “the text and the structure of the FTC Act reveal the FTC lacks substantive rulemaking authority with respect to unfair methods of competition, under Section 6(g) […] Thus, when considering the text, Section 6(g) specifically, the Court concludes the Commission has exceeded its statutory authority in promulgating the Non-Compete [Final] Rule.” Further, the Court held that the rule itself “is based on inconsistent and flawed empirical evidence, fails to consider the positive benefits of non-compete agreements, and disregards the substantial body of evidence supporting these agreements.”

The FTC rule, finalized on April 23,  2024, would have prohibited employers from enforcing both existing and future noncompete agreements against workers – affecting both employees and independent contractors. The FTC’s rulemaking rationale was that allowing employers to enforce noncompete agreements was an “unfair method of competition” under the Federal Trade Commission Act as it restrains workers from securing other work opportunities in their industry. Read an FTC Fact Sheet here. 

The U.S. Chamber of Commerce, who intervened in the case alongside the Business Roundtable and the Texas Association of Business, applauded the court’s decision, saying, “Since its inception over 100 years ago, the FTC has never been granted the constitutional and statutory authority to write its own competition rules. Non-compete agreements are either upheld or dismissed under well-established state laws governing their use.” The Chamber called the decision “a significant win” and said a “sweeping prohibition of noncompete agreements by the FTC was an unlawful extension of power that would have put American workers, businesses, and our economy at a competitive disadvantage.”  

For background, AAPL has been reporting on this rulemaking since the initial FTC proposal in 2023 when we provided opportunities for members to submit public comments. Since then, we fielded many concerns from members about how the rule would impact them and their businesses as the implementation date grew closer. From the outset, the rule was subject to numerous legal challenges throughout the country, and this most recent decision by the U.S. District Court for the Northern District of Texas is significant because had the rule gone into effect, it was expected to create considerable disruptions and business uncertainty for many of our members.

Although the FTC has suggested they may appeal the ruling, at present, the rule will not go into effect as planned and the existing status quo will be preserved. 

For more information about the FTC rule with access to additional resources, you may refer to both the April 29, 2024, and July 22, 2024, governmental affairs reports available exclusively for AAPL members on our website.