In a ruling with nationwide effect, the U.S. District Court for the Northern District of Texas blocked the enforcement of the Federal Trade Commission’s (FTC) new rule intended to restrict the use of most non-compete agreements.

The rule, which would have required employers to issue notices stating that their existing non-compete agreements were unenforceable, was slated to go into effect on September 4.

But the Texas decision, issued on August 20, prevents the rule from going into effect.

Lack of statutory authority

In the case of Ryan, LLC v. Federal Trade Commission, the Texas court granted summary judgment in favor of the plaintiffs, finding that the FTC lacked the statutory authority to issue the non-compete rule.

The court further criticized the rule as “arbitrary and capricious.” The court said that the FTC overstepped its bounds under the Administrative Procedure Act (APA) and the Declaratory Judgment Act, concluding that the rule must be “set aside” on a nationwide scale, not just for the plaintiffs involved in the case.

The court’s ruling emphasized that the FTC’s attempt to impose a blanket prohibition on non-compete agreements across the board was overly broad and lacked sufficient justification.

The FTC did not adequately explain why such a sweeping rule was necessary instead of targeting only those agreements that have been proven harmful, the court said.

The court went on to find that the FTC non-compete rule disregarded the benefits of non-competes and was not based on solid empirical evidence.

The impact

The Texas court’s ruling completely blocks the enforcement of the FTC’s rule across the country. The ruling states that the FTC cannot extend its regulatory powers beyond what is explicitly authorized by Congress, particularly regarding rules that significantly alter the landscape of employment law.

The decision comes on the heels of another ruling just days earlier, in which the U.S. District Court for the Middle District of Florida also found the FTC’s rule invalid, albeit on different grounds. The Florida court said that the FTC has some authority to institute substantive rules but found that this authority does not allow the FTC to make decisions relevant to “major questions” of policy.

Appeal expected

The FTC is expected to appeal the ruling to the 5th U.S. Circuit Court of Appeals.

The agency may also request a stay of the ruling during the appeal process, which would temporarily reinstate the rule until the higher courts have ruled on it.

Employers are advised to stay informed about developments related to the enforceability of the FTC rule. For the time being, companies may continue to use non-compete agreements.