Federal District Court Strikes Down FTC’s “Non-Compete” Rule

On August 20, 2024, a federal district court judge in Texas issued a 27-page opinion striking down the Federal Trade Commission’s “Non-Compete Rule,” which banned non-compete covenants and was set to take effect on September 4, 2024.  Ryan LLC v. Federal Trade Commission, Dkt. No. 24-cv-986, 2024 WL 3879954 (N.D. Tex. Aug. 20, 2024).

The rule was challenged by a Texas company and a handful of business organizations (including the U.S. Chamber of Commerce) on grounds that the rule exceeded the FTC’s statutory authority, was an unconstitutional assertion of agency power, and was arbitrary and capricious.

The challengers were able to convince the court back in July that the rule was likely an invalid exercise of the Agency’s authority, but the court held at that time that the rule was only invalid as applied to the plaintiffs—refusing to extend its order nationwide.

In the wake of the court’s July 2024 ruling, the parties filed cross-motions for summary judgment. As discussed in detail below, the court granted the plaintiffs’ motions, denied the government’s motion, and blocked enforcement of the rule anywhere in the country going forward.

Although it is possible that the court’s ruling could be reversed on appeal, the important takeaway for Colorado employers today is that only state law will continue to apply for the foreseeable future, and they can continue utilizing such covenants provided they comply with extant Colorado law. You can read C&H’s analysis of the 2023 amendments to the Colorado non-compete law here: Colorado's Non-Compete Rewrite: One Year In, What Does It Mean for Businesses and Key Employees.  

The FTC’s Non-Compete Rule:

After years of conducting public hearings and workshops, inviting public comment, and reviewing academic studies regarding non-compete clauses, the FTC eventually issued a Notice of Proposed Rulemaking on the subject in January 2023.  

In so doing, the Agency announced that it was proposing the rule to articulate that “it is an unfair method of competition for an employer to enter into or attempt to enter into a non-compete clause with a worker; to maintain with a worker a non-compete clause; or, under certain circumstances, to represent to a worker that the worker is subject to a non-compete clause.”  88 Fed. Reg. 3482, 3482 (Jan. 19, 2023).

The final rule was then promulgated on April 23, 2024.  16 C.F.R. § 910.  Under the terms of the new rule, federal law was to distinguish between “workers” on the one hand, and “senior executives” on the other.  The rule barred employers from entering into a non-compete clause with either category of worker, and limited employers’ ability to enforce non-compete agreements with senior executives if those agreements were entered into after the final rule’s effective date.  (Non-competes between employers and senior executives effective before the final rule remained enforceable, and certain other carveouts, including for non-competes relating to the good-faith sale of business, were included as limitations on the rule.)

The District Court’s Ruling:

The district court struck down the FTC’s Non-Compete Rule on two separate legal grounds, both of which arise under section 706 of the Administrative Procedure Act.  

The court first held that the FTC lacked the statutory power to enact the Non-Compete Rule, because the statutory text authorizing the Agency to issue rules and regulations combating perceived unfair competition limits the Agency’s power to issuing those rules and regulations that are procedural, not substantive, in nature.  In so holding, the court analyzed the statutory text, structure, and history, and concluded that each of those analytical inputs—or what the Supreme Court elsewhere has referred to as the “traditional tools of statutory interpretation,” see, e.g., Am. Hosp. Ass’n v. Becerra, 596 U.S. 724, 739 (2022)—compelled the conclusion that the Non-Compete Rule exceeded the bounds of the FTC’s authority.

Second, the court held that the final rule was arbitrary and capricious.  This was so, the court found, because the final rule was unreasonably overbroad, “imposes a one-size-fits-all approach with no end date,” bans non-competes that no state in the country has seen fit or necessary to forbid, ignores “the positive benefits of non-compete agreements,” and “disregards the substantial body of evidence supporting these agreements.”

Finally, the court held that its order striking down the final rule applied nationwide.  Although orders from individual federal district courts enjoining legislation nationwide—that is, beyond the litigants before the court—recently have come under increased judicial scrutiny, see, e.g., Labrador v. Poe by and through Poe, No. 144 S. Ct. 921, 925, 926-28 (2024) (Gorsuch, Thomas, and Alito, JJ., concurring in the grant of stay) (noting that the case raises “question[s] about the propriety of universal injunctive relief—a question of great significance that has been in need of the Court's attention for some time,” and analyzing propriety) (citations omitted), the Texas district court correctly concluded that its order would raise no such problems, because the APA itself mandates that courts “hold[ing] unlawful” regulations are to “set aside” those regulations, and that the APA does not envision “party-specific relief.”

So What Comes Next for Colorado Employers?

Although the FTC’s Non-Compete Rule surely caused consternation and quick corrective action by businesses large and small through Colorado and elsewhere, the upshot of the Texas court’s decision is a return to the pre-April status quo.

What that means, of course, is that for now, and for the foreseeable future, Colorado businesses are governed by Colorado’s non-compete statute, and only Colorado’s non-compete statute.  Those employers are fully authorized to continue to enter into such agreements with their employees irrespective of the federal government’s apparent wishes—so long as they do so consistent with the strictures of Colorado law. [Colorado's Non-Compete Rewrite: One Year In, What Does It Mean for Businesses and Key Employees]