The U.S. District Court for the Northern District of Texas has blocked enforcement of the Federal Trade Commission’s (FTC’s) rule banning virtually all noncompete agreements. The stoppage of the FTC rule applies nationwide. The rule was scheduled to take effect as of September 4 but is now on hold as a result of the August 28 federal district court ruling.

The court wrote, in Ryan, LLC v Federal Trade Commission, that “the FTC lacks the statutory authority (under the Administrative Procedures Act) to promulgate the Non-Compete Rule, and…the rule is arbitrary and capricious.” The opinion specified that its summary judgement for the plaintiffs who sued to overturn the rule applies nationwide. It is “not party-restricted and affects persons in all judicial districts equally.”

The Texas federal district court noted that although the lack of statutory authority was enough to block enforcement of the rule, there are other grounds on which to rest the decision, too. The rule is “unreasonably overbroad without a reasonable explanation,” the court wrote. “The Commission’s lack of evidence 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, renders the Rule arbitrary and capricious. In sum, the Rule is based on inconsistent and flawed empirical evidence, fails to consider the positive benefits of non-compete agreements, and disregards the substantial body of evidence supporting these agreements.”

Prospects: It is probable that the FTC will appeal this decision to the Fifth Circuit Court of Appeals. Given that other federal district courts have reached either narrower (applicable only to the parties to the lawsuit) or contrary conclusions, it is likely that the ultimate decision on the validity of the FTC rule will be decided by the U.S. Supreme Court. In light of that, some experts are predicting that the FTC will ask the Fifth Circuit to stay the nationwide blockage of enforcement of the rule during the appeals process. But for the moment, the rule cannot be enforced, pending an answer from the Fifth Circuit if in fact, as predicted, the FTC appeals the district court ruling.

NAIFA Staff Contacts: Diane Boyle – Senior Vice President – Government Relations, at dboyle@naifa.org; or Jayne Fitzgerald – Director – Government Relations, at jfitzgerald@naifa.org; or Michael Hedge – Senior Director – Government Relations, at mhedge@naifa.org.