Attorney at Law
In its last mailer, Mitchell & Sheahan, P.C. discussed the then-pending Federal Trade Commission’s (“FTC”) rule. This rule, which was set to take effect on September 4th, aimed to restrict most noncompetition agreements. However, the United States District Court for the Northern District of Texas has since issued a summary judgment ruling in the case Ryan LLC v. FTC, Civil Action No. 3:24-CV-00986-E, 2024 U.S. Dist. LEXIS 148488, at *1 (N.D. Tex. Aug. 20, 2024), striking down the FTC’s rule and ordering that it “shall not be enforced or otherwise take effect on September 4, 2024, or thereafter.”
The District Court found several flaws in the FTC’s rule. First, the FTC exceeded the statutory authority that Congress gave it. According to the decision, Congress did not provide the FTC with the necessary substantive rulemaking powers to issue such a wide-ranging ban for most noncompetition agreements. Second, the District Court found that the FTC’s rule was arbitrary and capricious. As the decision explained, “the [r]ule is arbitrary and capricious because it is unreasonably overbroad without a reasonable explanation. The [r]ule imposes a one-size-fits-all approach with no end date, which fails to establish a rational connection between the facts found and the choice made.”
It is important to note that while this ruling came from a trial court in Northern Texas, its impact is national. The District Court emphasized that the law governing federal agencies, the Administration Procedures Act (“APA”), does not allow for only “party-specific relief” but has a “‘nationwide effect’ . . . and ‘affects persons in all judicial districts equally.’” Therefore, the decision applies with equal force whether a noncompetition agreement is between parties in Alaska, Texas, Guam, or Connecticut.
Despite the District Court’s ruling, employers and employees should still consult with their attorneys or human resources department about any noncompetition agreements they have in place. While the FTC rule is currently blocked, the Agency is expected to appeal the District Court’s ruling, which could bring it back into consideration. This potential appeal underscores the need to stay alert and mindful of future developments. Additionally, the FTC has stated that even under the summary judgment decision, it still has the power to determine whether individual non-compete agreements are unfair restrictions on competition.