Federal court for the Northern District of Texas strikes down FTC’s noncompete rule

A recent ruling from the United States District Court for the Northern District of Texas has significant implications for the future of noncompete agreements in the U.S. In the case of Ryan LLC v. Federal Trade Commission, the court set aside the Federal Trade Commission’s Noncompete Rule, which would prohibit most noncompete clauses across the country. This ruling marks a substantial setback for the FTC’s efforts to regulate these agreements on a federal level.

The court’s decision

The case centered on the FTC’s authority to implement the Noncompete Rule under the Federal Trade Commission Act, which created the FTC back in 1914. Ryan, supported by several business organizations, argued that the FTC had exceeded its statutory authority in creating a rule that broadly banned noncompete agreements. The FTC contended that it was within its rights to issue such a rule under its mandate to prevent unfair methods of competition.

However, the court sided with Ryan, determining that the FTC lacked the substantive rulemaking authority to implement the Noncompete Rule. The court concluded that the FTC’s powers under the Federal Trade Commission Act do not extend to creating such sweeping regulations without explicit congressional authorization.

Arbitrary and capricious

Beyond the question of authority, the court also found the Noncompete Rule to be arbitrary and capricious. It criticized the FTC for relying on inconsistent and flawed evidence to support its decision to implement a categorical ban on noncompetes.

The court noted that the FTC failed to consider less restrictive alternatives that could achieve similar goals without imposing a nationwide ban. This failure, the court ruled, rendered the rule legally unsound.

In the shadow of Chevron

This decision was heavily influenced by the recent Supreme Court rulings in Loper Bright Enterprises v. Raimondo and Relentless Inc. v. Department of Commerce that overturned the landmark Chevron U.S.A. Inc. v. Natural Resources Defense Council Inc. case. The Chevron doctrine had long granted federal agencies significant deference in interpreting ambiguous statutes.

However, with the Supreme Court’s recent rejection of Chevron deference, courts are now less likely to defer to agencies’ interpretations of their statutory authority. This shift played a crucial role in the Ryan LLC case, as the court cited those cases as it closely scrutinized the FTC’s claim of authority, ultimately finding it lacking. Without the shield of Chevron deference, the FTC’s justification for its Noncompete Rule did not withstand judicial review.

Implications for agents

The ruling means that, for now, the FTC’s Noncompete Rule will not take effect on its planned enforcement date of Wednesday, Sep. 4, 2024. Noncompete agreements will continue to be governed by state laws, which vary significantly across the country. This decision underscores the ongoing debate over the balance between protecting employees from restrictive covenants and allowing businesses to safeguard their interests.

While this ruling is a victory for businesses that use noncompete agreements, it also sets the stage for potential further legal battles. The FTC may appeal the decision. But for now, the court’s ruling keeps the status quo intact, leaving noncompetes as a state-regulated issue.

Learn more about the FTC’s planned noncompete ban here.