Texas Court Sets Aside FTC Noncompete Rule, With Nationwide Effect

At a Glance

• In the Ryan v. FTC litigation, the Northern District of Texas has issued its final decision on the parties' summary judgment motions and concluded that the FTC noncompete rule is unlawful. The court ordered: "The Non-Compete Rule . . . is hereby SET ASIDE and shall not be enforced or otherwise take effect on September 4, 2024, or thereafter."

On August 20, 2024, the U.S. District Court for the Northern District of Texas issued a memorandum opinion and order holding that the Federal Trade Commission (FTC) rule banning post-employment noncompetes (Noncompete Rule) is “unlawful” and therefore must be “set aside.” In Ryan LLC v. Federal Trade Commission, Civ. Action No. 3:24-CV-00986 (N.D. Tex. Aug. 20, 2024), Judge Ada Brown concluded that the FTC exceeded its statutory authority in issuing the Noncompete Rule and further found the Noncompete Rule to be arbitrary and capricious. Judge Brown ruled that her order “has nationwide effect, is not party-restricted, and affects persons in all judicial districts equally.”  Therefore, employers do not need to issue the notices required by the Noncompete Rule by September 4, 2024, and may continue to enforce and enter into post-employment noncompete agreements with employees and independent contractors to the extent allowed by state law. 

Procedurally, the Ryan court’s order arose out of the plaintiff’s, plaintiff-intervenor’s and FTC’s respective motions for summary judgment. The court had earlier issued a memorandum opinion and order granting a preliminary injunction staying the effective date of the Noncompete Rule, finding a likelihood of success on the merits to the argument that the FTC exceeded its authority in issuing the Noncompete Rule. In granting the plaintiffs’ motion for summary judgment and denying the FTC’s cross-motion for summary judgment, the court’s analysis shifted from likelihood of success on the merits to a final adjudication of the enforceability of the Noncompete Rule.   

In its decision, the Ryan court held that the text and structure of the FTC Act makes it clear that the FTC did not have statutory authority to promulgate the Noncompete Rule. In addition, the court found the Noncompete Rule to be arbitrary and capricious. The court reasoned:

[T]he Rule is arbitrary and capricious because it is unreasonably overbroad without a reasonable explanation.  The Rule imposes a one-size-fits-all approach with no end date, which fails to establish a rational connection between the facts found and the choice made.

In addition, the court further noted that the FTC had no evidentiary support for such a sweeping prohibition instead of targeting specific, harmful noncompetes. “In sum, the Rule 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.” Finally, the court noted that the FTC failed to sufficiently address less disruptive alternatives to issuing the Noncompete Rule. 

Having found that the FTC exceeded its authority in issuing the Noncompete Rule and that the rule is arbitrary and capricious, the court found that its Order automatically must have nationwide effect. As such, all employers may rely on the decision unless and until the Ryan decision is reversed.