Texas Federal Court Invalidates FTC’s Non-Compete Ban As Unconstitutional

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A federal judge in Texas has barred enforcement of the Federal Trade Commission’s (FTC’s) new regulations, which otherwise would have banned most non-compete agreements.

Holding that the FTC lacked statutory authority to issue the ban, United States District Judge Ada E. Brown permanently set it aside in an order issued Tuesday evening, two weeks before its September 4 effective date.

The FTC had issued the broad ban on April 23, 2024, seeking to bar enforcement of non-compete agreements across the country with only narrow exceptions. Ryan LLC, a Texas tax services firm, filed suit in the United States District Court for the Northern District of Texas, claiming the ban was an unconstitutional overreach.

Judge Brown agreed and held that the FTC had overstepped its statutory authority. Construing the language and history of the FTC Act, as well as its amendments, Judge Brown concluded that the FTC Act vests the FTC with “some authority to promulgate rules to preclude unfair methods of competition.” However, the FTC Act does not vest the FTC with authority for substantive rule-making. Concluding that the non-compete ban was a substantive rule, Judge Brown held that the FTC exceeded its statutory authority in its promulgation.

Judge Brown also held that the ban was arbitrary and capricious because “it is unreasonably overbroad without a reasonable explanation.” Judge Brown took issue with the ban’s “one-size-fits-all approach with no end date” and absence of facts in the rulemaking record supporting its promulgation. Judge Brown noted that no state non-compete law sweeps as broadly as the FTC’s ban. Judge Brown further concluded that the FTC relied upon erroneous empirical evidence; failed to consider the benefits of non-compete agreements; and failed to address, or even to conduct an analysis into, whether less disruptive alternatives were at its disposal.

A spokesperson for the FTC indicated that the agency was disappointed with Judge Brown’s order and is contemplating a potential appeal. But the order makes clear that the non-compete ban will not become effective on September 4, and it is unlikely to be revived any time soon.

Federal courts in Pennsylvania and Florida are considering separate challenges to the ban. The Florida court issued an injunction last week prohibiting the FTC from enforcing the ban, but only applied the ruling to the employer who brought the case. The Pennsylvania court in July refused to enjoin the ban, holding that it was probably lawful. The split in these rulings may mean that the legality of the ban may ultimately end up in the U.S. Supreme Court.

If you have any questions about the status of the FTC’s Non-Compete Rule or the Northern District of Texas’s August 20 order, please contact the authors of this alert.