Earlier today, the U.S. District Court for the Northern District of Texas held that the Federal Trade Commission’s rule banning noncompete agreements, which was set to go into effect on September 4, 2024, is “unlawful” and must be “set aside.” The court rejected the Commission’s argument that relief should be limited to the named plaintiffs, stating that the rule “shall not be enforced or otherwise take effect.”
The court based its ruling on two grounds: that the Commission exceeded its statutory authority in issuing the rule, and that the rule is arbitrary and capricious in violation of the Administrative Procedure Act. As to the former, the court held that Sections 5 and 6(g) of the FTC Act do not authorize the Commission to issue substantive rules on unfair methods of competition. As to the latter, the court held that the Commission based its rule on “inconsistent and flawed empirical evidence,” did not consider the “positive benefits of non-compete agreements,” and “failed to sufficiently address alternatives to issuing the Rule.”
Although the decision is subject to appeal, it marks the first nationwide ruling declaring the Commission’s noncompete rule unlawful. Prevailing in the case are plaintiff Ryan, LLC, as well as plaintiff-intervenors the U.S. Chamber of Commerce, Business Roundtable, Texas Association of Business, and Longview Chamber of Commerce, which are represented by Sullivan & Cromwell.