Posted on August 27th, 2024

Employers who use non-compete agreements to safeguard trade secrets and other key business interests received welcome news on August 20. The Federal Trade Commission’s (FTC) final non-compete rule, which aimed to ban most non-compete agreements and mandate employers to issue non-enforcement notices, has been set aside by a Texas court. This means the rule, initially scheduled to take effect on September 4, will not be enforced.

 

The Court’s Ruling Explained

In the case of Ryan, LLC v. Federal Trade Commission, the U.S. District Court for the Northern District of Texas ruled in favor of the plaintiffs, determining that the FTC lacked the statutory authority to issue the non-compete rule. The court’s decision was based on the Administrative Procedure Act (APA) and the Declaratory Judgment Act, deeming the rule both “arbitrary and capricious.”

This ruling effectively halts the enforcement of the FTC’s non-compete rule on a national scale, impacting all employers, not just the plaintiffs involved in the case. The court's decision means that the rule will not take effect and cannot be enforced across the country.

 

Why Did the Court Block the Rule?

The court found the FTC’s justification for the non-compete rule to be overly broad and lacking in substantial evidence. Specifically, the court criticized the FTC for failing to provide a reasonable explanation for imposing such a sweeping prohibition that would have banned almost all non-compete agreements. The ruling pointed out that the FTC did not adequately consider the positive aspects of non-competes, nor did it sufficiently justify the need for such an extensive ban.

 

What’s Next for Employers?

While the FTC may appeal this decision to the U.S. Court of Appeals for the Fifth Circuit, or even the U.S. Supreme Court, employers now have some breathing room. It’s crucial to use this time to evaluate your current non-compete agreements and engage in proactive contingency planning.

 

At HRSG, we understand the complexities of employment law and are here to help you navigate these changes. If you need assistance or have questions about how this ruling impacts your business, please don’t hesitate to reach out.

Stay informed and prepared with HRSG by your side!