August 22, 2024 | by Linda Wong, CEO & Partner

A significant rule proposed by the U.S. Federal Trade Commission (FTC), which aimed to prohibit most noncompete clauses in employment contracts, was struck down by the U.S. District Court for the Northern District of Texas this Tuesday, August 20, 2024. U.S. District Judge Ada Brown ruled that the FTC lacks the authority to implement such a sweeping ban. This decision in Ryan LLC v. Federal Trade Commission has wide-reaching implications for employers and employees across the United States.

Background of the Case

The FTC’s Non-Compete Rule, codified at 16 C.F.R. § 910.1–.6, was introduced as part of the Biden administration’s broader efforts to enhance labor market competition and protect workers’ mobility. The rule aimed to prohibit employers from entering into or enforcing non-compete agreements with workers, a move the FTC argued would benefit millions of employees and stimulate the economy. The rule was first announced in April and slated to take effect on September 4, 2024.

However, the rule faced immediate legal challenges from Ryan LLC and several influential business groups, including the Chamber of Commerce of the United States of America, Business Roundtable, Texas Association of Business, and Longview Chamber of Commerce. These plaintiffs argued that the FTC had overstepped its statutory authority and that the rule was arbitrary and capricious. In her ruling, Judge Brown emphasized that, even if the FTC possessed the authority to enact such a regulation, it had failed to consider alternatives and adequately justify the need to ban nearly all noncompete agreements, rather than targeting only those deemed harmful.

The Court’s Ruling

In the memorandum opinion and order, the court granted the plaintiffs’ motions for summary judgment and denied the FTC’s cross-motion for summary judgment. The court found that the FTC exceeded its statutory authority under the Federal Trade Commission Act by attempting to implement the Non-Compete Rule.

“The role of an administrative agency is to do as told by Congress, not to do what the agency thinks it should do,” the court stated, emphasizing that the FTC does not possess the authority to promulgate substantive rules regarding unfair methods of competition without explicit congressional authorization.

The court further criticized the FTC’s reliance on Section 6(g) of the Federal Trade Commission Act, which grants the agency the power to make rules for carrying out the provisions of the act. The court noted that while the FTC has the authority to issue procedural rules, it does not have the power to enact substantive rules like the Non-Compete Rule, which would significantly alter the legal landscape for employer-employee relationships.

Implications of the Decision

The court’s decision to set aside the Non-Compete Rule means that it will not take effect on its scheduled date of September 4, 2024, or at any time thereafter. This ruling has significant implications for both employers and employees. For employers, it means that non-compete agreements will continue to be governed by state laws, many of which permit such agreements under certain conditions. Business groups view non-compete clauses as essential for safeguarding intellectual property and confidential information.

For employees, the ruling represents a setback in efforts to increase job mobility and limit restrictive covenants that can hinder career advancement. The FTC had estimated that nearly 30 million American workers are subject to non-compete agreements, including not only high-level and many hourly workers. The agency argued that non-compete agreements suppress wages and limit opportunities.

As the legal proceedings advance, businesses and workers will need to stay informed about any potential changes or developments. The current ruling highlights the broader discussion on the extent of federal regulatory authority and its impact on business practices. This case exemplifies the dynamic nature of legal interpretations and regulatory oversight in the evolving landscape of employment law.

¹ Wynne Galczynski, Marketing Communications Specialist at Wong Fleming, P.C., also contributed to this article.