KMK Law Management Rights Blog

After a summer of speculation, businesses and individuals across the country were provided some clarity as the Federal Trade Commission’s (FTC) rule invalidating millions of non-compete agreements was struck down by a federal district court. The FTC’s rule—which largely invalidated non-compete agreements—was announced in April and set to take effect on September 4, 2024. Since that announcement, however, multiple lawsuits have been filed against the FTC, challenging its rulemaking authority to impose this sweeping new rule. In the months that followed, all eyes have been on the courts to see whether the rule would take effect as scheduled.

Initially, opponents of the FTC’s non-compete rule pursued preliminary injunctions, which would have enjoined enforcement of the rule until the FTC’s authority could be fully litigated. On July 3, 2024, The U.S. District Court for the Northern District of Texas granted an injunction in Ryan LLC v. Federal Trade Commission, but limited that injunction to cover just the specific plaintiffs in the case. Following that ruling, opponents of the non-compete rule hoped the U.S. District Court for the Eastern District of Pennsylvania would issue a broader injunction, but the Court there declined the request all together in ATS Tree Services, LLC v. Federal Trade Commission.  

Without a nation-wide injunction in place, the non-compete rule was set to go into effect in a matter of weeks. However, in a ruling announced August 20, 2024, Judge Ada Brown for the Northern District of Texas issued her decision on the merits in Ryan LLC, granting the plaintiffs’ request for summary judgment and setting aside the non-compete rule. Accordingly, the rule will no longer go into effect September 4.   

In her decision, Judge Brown found that the FTC lacks substantive rulemaking authority with respect to unfair methods of competition, and therefore exceeded its statutory authority in promulgating the non-compete rule. Further, Judge Brown determined that even if the FTC did have substantive rulemaking authority, the agency did not provide a reasonable explanation for its “unreasonably overbroad” rule, finding the rule to be arbitrary and capricious and thus invalid. The Judge found the rule was based on inconsistent and flawed empirical evidence, failed to consider the positive benefits of non-compete agreements, disregarded the substantial body of evidence supporting non-compete agreements, and failed to sufficiently address alternatives to issuing the rule.    

The FTC has the ability to appeal this ruling to the U.S. Court of Appeals for the Fifth Circuit, and from there to the U.S. Supreme Court. Before the appeals process can play out, however, the nation will take to the polls in November, and a new President will be sworn in come January. The ultimate fate of the non-compete rule will be impacted as much by the political process as by the judicial process. In the meantime, if you have any questions concerning the rule or any matters related to non-compete agreements, do not hesitate to reach out to a member of the Labor and Employment Group.