Overview
A federal court has set aside the Federal Trade Commission's new non-compete rule. As a result, businesses that were gearing up to comply with the rule can press "pause" on those preparations; for now, there is no rule compelling companies to issue notices that non-compete terms are unenforceable or to change their use of non-compete terms in future employment contracts.
On August 20, 2024, Judge Ada Brown of the Northern District of Texas granted summary judgment to plaintiffs challenging the Federal Trade Commission’s proposed rule declaring most non-compete agreements unenforceable. In her earlier July 3, 2024 order in the same case, Judge Brown granted plaintiffs a preliminary injunction against the FTC, temporarily prohibiting FTC enforcement of the proposed non-compete rule against any of the named plaintiffs (click here for our analysis of the July 3 decision). In her August 20 decision, Judge Brown ruled on the merits, holding that (1) Congress has not authorized the FTC to issue substantive rules of general application in support of its authority to investigate and challenge purportedly "unfair methods of competition;" and (2) that the FTC’s actions in developing and proposing its non-compete rule were arbitrary and capricious. Moreover, in contrast to her preliminary injunction decision, Judge Brown's summary judgment decision by its terms prohibits the rule from being enforced or taking effect nationwide. While Judge Brown’s new decision does not directly conflict with a Pennsylvania-based federal judge's decision not to issue a preliminary injunction in a similar challenge to the same FTC rule, the nationwide application of Judge Brown’s decision arguably makes it the first real move in a national-scope chess match over that rule that will play out in federal appellate courts in the coming months.
Judge Brown’s summary judgment reasoning in her new order largely mirrored her analysis when she concluded in her July preliminary injunction ruling that plaintiffs were likely to succeed on the merits at trial. Specifically, Judge Brown first concluded that nowhere in the Federal Trade Commission Act did Congress authorize the FTC to make substantive rules of general application to regulate purportedly "unfair methods of competition." She interpreted the primary relevant statutory section as permitting only the promulgation of "housekeeping rules," or “rules of agency organization, procedure, or practice," and rejected the FTC’s arguments that both its issuance of a handful of substantive rules in the 1960s and 1970s and subsequent amendments to the FTC Act demonstrated that Congress intended the FTC to have substantive rulemaking power to regulate "unfair methods of competition."
Similarly, Judge Brown's opinion concluded that the FTC's justifications for the proposed rule were based on “inconsistent and flawed empirical evidence,” that the FTC "fail[ed] to consider the positive benefits of non-compete agreements," and that the FTC "disregard[ed] the substantial body of evidence supporting these agreements." She also determined that the FTC "failed to sufficiently address alternatives to issuing the Rule." Accordingly, she found the agency's action was "arbitrary and capricious," which separately justifies invalidation of the rule.
Unlike her July preliminary injunction decision, which prohibited only FTC enforcement against the specific named plaintiffs in the case, Judge Brown's August 20 summary judgment decision states that it applies nationwide. The opinion explains that when courts invalidate federal agency action pursuant to challenges brought under the Administrative Procedure Act, they must "hold unlawful and set aside agency action” on a nationwide basis that "affects persons in all judicial districts equally" rather than rendering "party-restricted" relief.
The FTC will almost certainly appeal Judge Brown's decision to the Fifth Circuit Court of Appeals, which currently boasts several market-oriented, business-friendly judges. And unless the FTC loses in all of the other cases challenging the rule (a result that seems unlikely given the current ideological polarization of federal courts and the fact that at least one judge has already concluded that challenges to the same rule are unlikely to be successful on the merits), it seems likely that the scope of the FTC's rulemaking authority and the legality of its non-compete rule will likely end up before the U.S. Supreme Court unless a Republican victory in the upcoming Presidential election leads a new administration to abandon defense of the rule.
For now, businesses should still at most take a wait-and-see approach to the proposed federal non-compete rule; in light of this decision, companies need not take any further steps in preparation for this rule. At the same time, as Judge Brown's opinion notes, most states already have their own rules regulating the use of non-compete terms in employee and independent contractor agreements. Judge Brown’s decision has no implications for those statutes. Therefore, companies should continue to educate themselves and adhere to the non-compete statutes in the states where they employ workers and independent contractors.
