A US federal court in Texas set aside the Federal Trade Commission’s (FTC) new ban on non-compete clauses on Tuesday, holding that the agency lacked the authority to issue the ban and that the new rule is “arbitrary and capricious.” This decision has significant implications for employers and employees navigating the complex landscape of non-compete agreements.
Judge Ada Brown of the Northern District of Texas ruled that the FTC Act, which gives the agency its authority, does not allow the FTC to make substantial rules with respect to unfair methods of competition. According to Judge Brown, while Congress intended for the FTC to craft rules to curb anticompetitive behavior, this authority only extends to procedural rules, which address how the FTC handles unfair competition claims.
The court also found that the FTC violated the Administrative Procedure Act’s arbitrary-and-capricious standard, which necessitates that courts “hold unlawful and set aside agency action, findings, and conclusions found to be … arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.” Judge Brown noted that the FTC’s rule was “unreasonably overbroad without a reasonable explanation,” citing that the rule imposed a “one-size-fits-all approach with no end date.”
This decision comes amid other legal challenges to the FTC’s non-compete clause ban. Earlier, another federal court in Florida temporarily blocked the ban from being enforced against a real estate broker, referencing the Major Questions Doctrine, a principle that precludes agencies from issuing rules of “vast ‘economic and political significance,’” without Congressional authorization.
However, not all rulings have been aligned. For instance, a federal judge in Pennsylvania rejected a similar challenge to the FTC’s ban in July, illustrating the legal uncertainties surrounding the non-compete clause ban.
This ruling is a setback for the FTC, which argued in a May 7, 2024, Federal Register entry that Congress had empowered and directed the Commission to prevent unfair methods of competition throughout the economy. The FTC had planned for the rule to take effect in most parts of the country on September 4.
Legal professionals and corporate counsel will need to closely monitor these ongoing developments as they could significantly impact the enforceability and future of non-compete clauses across various industries.
For further details, see the full article on JURIST.