On August 20, 2024, a federal judge set aside the Federal Trade Commission’s (“FTC”) ban on noncompete agreements (the “Rule”), which was to take effect in September of this year. The Rule had sought to characterize noncompete agreements in employment contracts as an unfair method of competition and effectively ban the use of such agreements nationwide. Earlier this spring, the Jackson Kelly Labor and Employment Team gave a preview of the Rule and what it might mean for employers.
The Texas district court’s decision, however, permanently blocked the Rule from going into effect. Judge Ada Brown found that the FTC exceeded its statutory authority in promulgating the Rule based on based on the Federal Trade Commission Act’s “housekeeping rules” that lack statutory penalties. Judge Brown also found the authority on which the FTC relied to be “suspect,” noting that Section 6(g) was included primarily with “investigative powers” and does not mention “any other substantive authority from where such substantive rulemaking power would stem.”
Moreover, the court determined the Rule to be an arbitrary and capricious “categorical ban” that violates the Administrative Procedures Act (“APA”). The court concluded that the Rule was arbitrary and capricious because it is “unreasonably overbroad without a reasonable explanation,” and “imposes a one-size-fits-all approach with no end date.” The court therefore “set aside” the Rule pursuant to the APA, meaning that the “Rule shall not be enforced or otherwise take effect on its effective date.”
The story is not over, though. The FTC has already announced it is seriously considering an appeal and will continue to address noncompetes on a case-by-case basis. The Rule had already faced challenges in court, but the August 20 decision was the first to completely block the Rule.
2024 has been a busy year on the labor and employment fronts, and the Jackson Kelly Labor and Employment Team continues to track these developments. If you have any questions regarding noncompetes or employment law in general, please contact us today.