On August 20, 2024, the Federal Trade Commission’s rule banning almost all non-compete agreements was struck down by a federal court for the Northern District of Texas, in Ryan LLC v. Federal Trade Commission. The FTC’s rule was set to take effect on September 4, 2024, and would have rendered all new non-compete agreements unenforceable, in addition to invalidating existing non-compete agreements for all employees other than “senior executives” as defined by the FTC. As a result of this decision, the FTC’s rule is enjoined nationwide unless overturned on appeal.

The Court found the FTC’s rule unlawful for two reasons. First, the Court determined that Section 6(g) of the FTC Act was a “housekeeping statute” which did not confer substantive rulemaking authority upon the FTC. The Court then turned to Section 18, which it found to authorize the FTC to promulgate substantive rules regulating unfair or deceptive acts or practices, not purportedly unfair methods of competition. Since the non-compete ban was a regulation on a method of competition, the Court found it to be outside the scope of Section 18.

Second, the Court found that the FTC’s rule was “arbitrary and capricious” as it was “unreasonably overbroad without a reasonable explanation.” More specifically, the Court noted that the FTC’s evidence offered in support of the rule had compared different states’ approaches to enforcing non-competes based on specific factual situations, rather than evaluating these approaches in the context of a categorical ban as the FTC was attempting to enact. As a result, the FTC’s lack of evidence offered in support of its categorical ban on non-competes rendered the rule arbitrary and capricious.

As this decision is likely to be appealed, all employers should monitor any new developments as Ryan works it way through the courts. Kullman attorneys are available to discuss both these and any future developments with you.