FTC’s Noncompete Ban Invalidated Nationwide for All Employers by Texas Federal Court

On August 20, 2024, the District Court for the Northern District of Texas, in Ryan LLC v. FTC, set aside the Federal Trade Commission’s (“FTC”) rule banning noncompete agreements. Unlike the court’s limited preliminary injunction issued last month, yesterday’s order applies to all employers nationwide. Accordingly, the FTC’s noncompete ban will no longer be effective on September 4, 2024. An FTC spokesperson said the agency is seriously considering an appeal, and that the decision does not prevent the FTC from addressing noncompetes through case-by-case enforcement actions.

The Ryan LLC Order
The court’s order granted summary judgment to the plaintiff and the intervenor U.S. Chamber of Commerce and rejected the FTC’s request for summary judgment. In so doing, the court officially “set aside” the FTC ban, meaning it is without effect and invalid nationwide. The Court found the FTC: (1) exceeded its statutory authority in creating the rule, and (2) the FTC’s ban was an arbitrary and capricious categorical ban in violation of the Administrative Procedures Act.

The court explained that section 6(g) of the FTC Act does not allow the FTC to create “substantive rules regarding unfair methods of competition” but is limited to “housekeeping rules.” The court also focused on the absence of a statutory penalty for violations of rules under section 6(g) and no historical precedent for using it to create rules as broad as the noncompete ban. The court’s holding that the rule was arbitrary and capricious found the rule is based on “inconsistent and flawed empirical evidence,” “imposes a one-size-fits-all approach with no end date,” and that the FTC failed to consider a more limited rule or more exceptions.

What Next?
Employers should watch for appellate developments related to the noncompete ban in not just the Ryan LLC case, but also the other two cases that have attacked the FTC’s rule: ATS Tree Services, LLC v. FTC in the Eastern District of Pennsylvania (declining to enjoin the rule) and Properties of the Villages, Inc. v. FTC in the Middle District of Florida (staying enforcement of the rule as to only the named plaintiffs). Indeed, considering the FTC spokesperson’s statement about an appeal, the United States Court of Appeals for the Fifth Circuit may be the next stop for the Ryan LLC case. Under the federal rules, government agencies have 60 days to decide whether to file a notice of appeal, which means the FTC must decide on an appeal in the Ryan LLC case by October 21, 2024. Of course, any appeal by the FTC may be more challenging in light of the Supreme Court’s June Loper Bright ruling that overruled 40 years of deference to federal agencies—a decision the Ryan LLC court cited multiple times in its order.

Beyond watching for appellate developments, employers should also be aware that the FTC may pursue more investigations of specific noncompete agreements. But with respect to the FTC’s noncompete rule, it has been invalidated for the foreseeable future. This means that employers can return to (or continue with) the status quo for noncompete agreements, which may include state law regulations (such as California and Minnesota) that will continue to apply.