“No More Non-Competes,” Part Four: Texas Federal District Court Blocks FTC Noncompete Rule on Nationwide Basis

On August 20, 2024, the U.S. District Court for the Northern District of Texas entered a final judgment (“Order”) setting aside, on a nationwide basis, the Federal Trade Commission (“FTC”) final rule (“Rule”) prohibiting non-competition agreements. The Court’s Order declared, “the Rule shall not be enforced or otherwise take effect on its effective date of September 4, 2024 or thereafter.” Accordingly, the FTC cannot enforce the Rule, and employers need not take any action to comply with the Rule at this point.

As we have detailed, in April 2024, the FTC issued the Rule, which would have prohibited businesses from entering into or enforcing non-compete clauses in nearly all agreements with workers. Since then, there have been various challenges to the Rule, including Ryan, LLC v. Federal Trade Commission Case (No. 3:24-cv-00986) pending in the Northern District of Texas (“Ryan”). As we previously reported, on July 3, 2024, the Court in Ryan issued a limited preliminary injunction prohibiting application of the Rule, but only with respect to the named Plaintiffs in that case. However, the Court’s Order also previewed that the Plaintiffs were likely to succeed on the merits of their claim that the Rule is unlawful. The Ryan Court’s final judgment reaffirmed the reasoning set forth in its prior order and expanded the injunction to apply to all employers, and on a nationwide basis.

In the August Order, the Court concluded that the Ryan Plaintiffs were entitled to summary judgment on all of their claims under the Administrative Procedure Act (“APA”) and Declaratory Judgment Act because (1) the FTC exceeded its statutory authority in implementing the Rule, as the FTC lacks substantive rulemaking authority with respect to unfair methods of competition, and (2) the Rule is arbitrary and capricious. In holding that the Rule is unlawful, based on the provisions set forth in 5 U.S.C. § 706(2), the Court determined the appropriate remedy under the APA was to set aside the Rule in its entirety. The Order clarified that, consistent with Fifth Circuit precedent, “setting aside agency action under § 706 has ‘nationwide effect,’ is ‘not party-restricted,’ and ‘affects persons in all judicial districts equally.’”

While the FTC may appeal the ruling to the Fifth Circuit, there is skepticism as to whether the agency would receive a different result from the Fifth Circuit, or the Supreme Court for that matter (particularly in light of the recent Loper Bright ruling, which abandoned the Chevron deference previously afforded to agency actions).

Although the Order relieved employers of the pressure to send out non-compete rescission notices or otherwise come into compliance with the Rule, it has no impact on state laws regulating non-competes. Those state laws continue to evolve, and employers must remain mindful of the changing landscape of state laws governing non-competes.

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This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.