FTC’s Rule Banning Noncompetes Struck Down by Federal Court

The Federal Trade Commission’s proposed rule banning noncompete agreements that was set to go into effect on September 4 was blocked on Tuesday by a federal court in Dallas. The court’s order striking down the rule is not surprising following its injunction last month against the rule. Unlike the prior injunction which applied only to the parties in the action, this week’s ruling has nationwide effect.

The court’s analysis focused on the FTC’s authority as granted by Congress and whether the FTC’s making of the rule was a lawful action the agency could undertake.  While the court acknowledged that the FTC has “some authority” to impose rules “to preclude unfair methods of competition,” the court found that it lacks the authority to create substantive rules such as its rule banning noncompetes. The court further found that the FTC’s rule is arbitrary and capricious because it is “unreasonably overbroad and without a reasonable explanation” by imposing a “one-size-fits-all approach with no end date.” The court determined that the rule failed to establish a “rational connection between the facts found and the choice made,” which is improper and cannot stand.

How This Court Ruling Impacts Employers

Had the FTC’s rule gone into effect, it would have rendered unenforceable existing noncompetes for the vast majority of workers in the U.S. Employers also would have been banned from entering into or attempting to enforce any new noncompetes, even if they involved senior executives.  Tuesday’s decision is being hailed as a significant win for employers because noncompetes remain valid in states like Texas that enforce noncompete restrictions. The court’s ruling does not affect state laws that limit noncompete restrictions, however, nor does it ensure courts that are hostile to noncompetes will change their views.

Our Firm will continue to monitor for any further developments and keep you informed. Do not hesitate to reach out to us with questions or to discuss proactive measures you can take to protect against competitive threats to your business.