Court Issues Nationwide Injunction Against FTC’s Noncompete Ban

Topics: Court Decisions, Non-Compete and Trade Secrets

As of yesterday afternoon, employers across the country that utilize noncompete agreements may breathe a sigh of relief, as Judge Ada Brown beat her self-imposed deadline of August 30, 2024 and ordered an end to any enforcement of the Federal Trade Commission’s (“FTC”) Noncompete Rule.  

Judge Brown, of the Northern District of Texas, evaluated competing motions for summary judgment filed by the Plaintiff, the related parties, and the FTC. She denied the FTC’s motion and granted the Plaintiffs’ motions. In reaching her decision, Judge Brown concluded that the FTC both exceeded its statutory authority derived from the Federal Trade Commission Act when it issued the Noncompete Rule earlier this year, and acted in an arbitrary and capricious manner in violation of the Administrative Procedures Act (“APA”).  

Judge Brown concluded that the Federal Trade Commission Act provided a limited role for making “housekeeping” rules to preclude unfair and deceptive practices, and as a result, the FTC lacks the authority to create substantive rules such as the Noncompete Rule that it promulgated.  

In addition, Judge Brown concluded that the record underlying the Noncompete Rule did not support the Noncompete Rule and was an arbitrary and capricious exercise of rulemaking. She ruled that the Noncompete 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.” Judge Brown also faulted the FTC’s failure to sufficiently consider alternatives to the Noncompete Rule that it published.

Because the Noncompete Rule exceeded the FTC’s statutory authority and was arbitrary and capricious, Judge Brown held that she was required to set the Noncompete Rule aside and order, on a nationwide basis, that the Noncompete Rule will not take effect on September 4, 2024 and may not be enforced.

Many practitioners expect that the FTC will attempt to appeal the ruling to the Fifth Circuit Court of Appeals, especially in light of last month's conflicting ruling by the Eastern District of Pennsylvania in ATS Tree Services, LLC v. Federal Trade Commission. Contrary to Judge Brown’s rulings, the Pennsylvania district court denied the plaintiff’s motion to enjoin and stay the FTC’s Noncompete Rule. The Pennsylvania district court held that the employer failed to demonstrate that the Noncompete Rule would cause irreparable harm or that the employer was likely to succeed on the merits. The FTC may use the ATS Tree Service decision in an effort to overturn Judge Brown’s injunction before the Fifth Circuit.  

The Takeaway 

For the time being, the federal FTC Noncompete Rule banning noncompete agreements nationwide is blocked.  Employers utilizing noncompete agreements with their employees need to focus instead on state law protections for employees, including states like California that ban noncompete agreements in the employment context.

Please contact Dan M. Forman and Ashley Halberda from CDF’s Trade Secret Practice Group for any assistance that you may require.