Texas Federal Court Strikes Down FTC’s Non-Compete Ban
On Tuesday, August 20, U.S. District Judge Ada Brown granted summary judgment, in favor of blocking the Federal Trade Commission’s (“FTC”) rule banning non-competes (the “Rule”). The Rule, which had been scheduled to go into effect on September 4, would have prohibited employers from entering into non-compete agreements that restrict workers from working for another employer or starting a business. An FTC spokesperson indicated that the FTC is “seriously considering” an appeal to the Fifth Circuit.
In a nutshell, the decision explains that the FTC:
- Exceeded its statutory authority and lacks substantive rule making power. The Court criticized the FTC’s use of the FTC Act (the “Act”), highlighting that Section 6(g) of the Act is intended to be a “housekeeping statute,” authorizing rules of agency organization, procedure, or practice and does not grant the FTC the authority to create substantive rules. The Court further emphasized that the Administrative Procedures Act (“APA”) does not grant the FTC the authority to create substantive rules regarding unfair methods of competition.
- Cannot enforce statutory penalties. The Court explained that there is no statutory penalty for violating rules promulgated under the Section the FTC relied on to create the Rule, which further supports the Court’s conclusion that this Section is not intended for substantive rulemaking.
- Created a Rule that is arbitrary and capricious under the APA. The Court reasoned that due to its sweeping and “one-size-fits-all” nature, without sufficient evidence or consideration of less restrictive alternatives, the Rule is arbitrary and capricious.
KEEP WATCHING OUR WEEKLY LP3 EMAILS. LP’s Employment & Executive Compensation Group is assessing the ruling and what it means for employers. We will provide additional information shortly.
We will also provide information on non-competes during our upcoming complimentary webinar on September 26 when we will review employment law developments over the past year and discuss what you need to be doing to be ready for 2025. Register here.