On August 20, 2024, Northern District of Texas Judge Ada Brown barred the U.S. Federal Trade Commission’s (FTC) rule banning non-competes from taking effect. The rule, which proposed to ban virtually all existing and future non-compete agreements across the U.S., and was scheduled to go into effect on September 4, 2024, is now effectively blocked.

Judge Brown reasoned that the FTC’s non-compete ban constituted an unlawful agency action, stating that the FTC lacks the authority to ban practices it deems unfair methods of competition by adopting substantive rules. Specifically, Judge Brown concluded that:

the FTC lacks statutory authority to promulgate the Non-Compete Rule, and that the Rule is arbitrary and capricious. Thus, the FTC’s promulgation of the Rule is an unlawful agency action . . .[The rule] is hereby SET ASIDE and shall not be enforced or otherwise take effect on September 4, 2024, or thereafter.”

Judge Brown further reasoned that the FTC’s “lack of evidence as to why they chose to impose such a sweeping prohibition . . . instead of targeting specific, harmful non-competes renders the rule arbitrary and capricious.” This ruling does not come as a surprise, as Judge Brown had previously temporarily blocked the non-compete ban for a small group of Texas employers while she considered whether to strike the rule down entirely.

Some common questions about this ruling are below:

Will the FTC appeal this ruling? FTC Spokesperson Victoria Graham has already announced the Commission is “seriously considering” a potential appeal. However, the Fifth Circuit Court of Appeals has historically been an unfriendly venue for agency rulemaking, and the pro-business Supreme Court is unlikely to disagree with Judge Brown’s reasoning. Further, courts are able to overrule agency actions more freely in the wake of the Supreme Court’s recent Loper Bright ruling, which famously struck down the Chevron doctrine.

How can a Texas court impose a nationwide ban on a federal agency’s rule? Per Judge Brown, “As the [Fifth Circuit] put it in a couple of recent cases, setting aside agency action under § 706 has ‘nationwide effect,’ is ‘not party-restricted,’ and ‘affects all persons in all judicial districts equally’. . . [T]his court must ‘set aside’ [the FTC’s rule] with nationwide effect.” Accordingly, this decision instantly ended the uncertainty plaguing employers after a Pennsylvania court recently declined a motion to block the non-compete ban.

What if we already issued notices of our intention not to enforce non-compete agreements to our workers under the rule? Some employers may have done so in anticipation of the non-compete ban potentially becoming effective on September 4^th.

If your business issued such a notice, contact a member of Reed Smith’s Labor and Employment team to discuss your options.