Judge Slams Door on FTC Non-Compete Ban – for Everyone

As we predicted here just a short time ago, a federal court has issued a ruling that blocks the FTC’s non-compete ban from taking effect nationally.

A federal district court judge in Texas granted summary judgment against the agency and set aside the rule, finding that the FTC lacked the authority to issue it.

The rule was set to take effect September 4.

Non-Compete Ban Is Put to Test

The suit was filed in late April of this year by Ryan LLC, which provides tax services and software. It challenged the agency’s statutory authority to issue the non-compete ban, insisting that the rule imposes too big of a burden on business owners. The case got a boost when the U.S. Chamber of Commerce and others joined as plaintiffs soon after the case was filed.

Ryan LLC was locked and loaded with its legal challenge to the rule’s validity. In fact, it filed its lawsuit to block the ban on the same day that the FTC adopted its final rule implementing it.

The lawsuit asserted that:

• the FTC lacked the statutory authority to make the rule.
• the rule resulted from an unconstitutional exercise of power, and
• the agency acted in an arbitrary and capricious manner.

Preliminary Injunction Blocks Non-Compete Ban

At the start of May, Ryan filed a motion for a preliminary injunction to temporarily block it while the matter proceeded. The court granted that motion on July 3.

Ryan then asked for summary judgment to be granted in its favor via a motion it filed on July 19. The FTC countered with its own summary judgment motion, which it filed on August 2.

The court issued its ruling on the motions August 20.

The FTC rule banning most non-compete agreements is arbitrary and capricious, the court said, because the FTC did not provide evidence to justify such a “sweeping prohibition.” Nor did the agency sufficiently address alternatives to the ban, it decided.

FTC Lacks Authority to Issue Non-Compete Ban

The court explained that although the FTC has some authority to make rules to ban unfair methods of competition, it does not have the authority to make substantive rules based on the relevant statutory language. It added that the lack of a statutory penalty for violating rules made under the relevant language shows that the agency lacks substantive rulemaking power.

The court held that the rule is unlawful and must be set aside. The ban on enforcement of the FTC’s prohibition of non-compete agreements has nationwide effect, it said.

“Today we prevail in protecting the very foundation of innovation that drives our economy from the overreach of the FTC in its misguided mission to invalidate millions of employment contracts,” said Ryan Chairman and CEO G. Brint Ryan in a statement about the ruling. “Non-competes serve as a cornerstone of mutual trust between employer and employee.”  

Other Cases Involving Non-Compete Ban

In other cases challenging the ban, a federal district court judge in Florida issued a preliminary injunction to block enforcement, while a federal district court in Pennsylvania denied a request for preliminary injunctive relief. The Texas case is the most important of the three because it is the first and only decision to date to apply on a national level.

The FTC has the option to appeal the Texas court’s ruling, which does not prevent it from attacking the validity of specific non-compete agreements on a case-by-case basis.

But the ruling means that at the present moment the rule’s previously scheduled September 4 effective date is on hold – and it is very unlikely that the non-compete ban in its present form will take effect on that date, if ever.

Remember, however, that this latest development does not invalidate or weaken existing state-law rules relating to non-compete agreements.

The case is Ryan LLC v. Federal Trade Commission, No. 3:24-CV-00986-E (N.D. Tex. 8/20/24).