Texas Court Strikes Down FTC Rule Banning Non Competes

On August 20, Judge Ada Brown, of the U.S. District Court for the Northern District of Texas, set aside a Federal Trade Commission (FTC) rule that would have banned nearly all non-compete agreements nationwide, holding the rule to be unlawful.

The Non-Compete Rule, which was set to take effect on September 4, would have prohibited organizations from entering into any new non-compete clauses with workers and from enforcing existing non-competes, except in limited circumstances.

The FTC had acknowledged that charitable and other 501(c)(3) organizations would generally be exempt from the final rule. It did take the position, however, that a nonprofit organization could be subject to the Commission's enforcement of the rule if met the definition of a corporation, as defined under the Federal Trade Commission Act, "organized to carry on business for its own profit or that of its members." Nevertheless, LeadingAge has been following the progress of this requirement closely.

The plaintiffs in the Texas case were tax services and software provider Ryan LLC; the U.S. Chamber of Commerce; the Business Roundtable; the Texas Association of Business; and the Longview Chamber of Commerce.

In the August 20 opinion and order, Judge Brown ruled that the FTC lacks the statutory authority to issue the Non-Compete Rule. The Judge ruled that the rule is arbitrary and capricious under the Administrative Procedure Act, explaining in part: "The record does not support the rule. …. [T]he FTC provides no evidence or reasoned basis …. As to why they chose to impose such a sweeping prohibition - that prohibits entering or enforcing virtually all non-competes - instead of targeting specific, harmful non-competes, … [or considering] the positive benefits of non-compete agreements." Having found a lack of statutory authority and that the rule is arbitrary and capricious, Judge Brown wrote, the Court must hold unlawful and set aside the FTC's rule with nationwide effect.

In a statement reported by various national media outlets, an FTC spokesperson expressed disappointment with the decision, noted that the Commission is seriously considering a potential appeal, and that the decision does not prevent the FTC from addressing non-competes through case-by-case enforcement actions.

We will continue to monitor legal developments relating to this rule, including the FTC's possible appeal of the decision to the U.S. Fifth Circuit Court of Appeals.