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August 21, 2024
Last week, we highlighted that the Federal Trade Commission’s “one size fits all” nationwide ban on noncompetition agreements was sowing chaos, particularly when nothing in the Federal Trade Commission Act empowers the FTC to enact a nationwide ban. Yesterday, the United States District Court for the Northern District of Texas agreed. The court ruled that the FTC exceeded its statutory authority and that the rule was arbitrary and capricious.[1]
Noting that “[s]tates have historically regulated non-competes through caselaw and statute,” the court found that the FTC lacks substantive rulemaking power to promulgate a nationwide ban. The court also concluded that “the Rule is arbitrary and capricious because it is unreasonably overbroad without a reasonable explanation.” The FTC failed to consider the “positive benefits of non-compete agreements and disregard[ed] the substantial body of evidence supporting these agreements.”
Although the FTC will inevitably appeal the decision, at least for now the mess that the FTC was creating for American employers who seek to reasonably protect their investment (blood, sweat, and tears) in intellectual capital, confidential and proprietary information, customers, goodwill, and know-how has been halted. Of course, all employers should judiciously use total noncompetition agreements and should ensure that they meet the state requirements for being limited in scope and duration and used only to protect their legitimate business interests.
This article is designed to provide one perspective regarding recent legal developments, and is not intended to serve as legal advice. Always consult an attorney with specific legal issues.
[1] Ryan LLC v. FTC, Civil Action No. 3:24-CV-00986-E (N.D. TX, August 20, 2024).
