FTC noncompete rule blocked

A federal court in Texas has permanently blocked nationwide the Federal Trade Commission (FTC) final rule banning noncompete agreements. The rule was set to go into effect in two weeks, on September 4. The same court earlier issued a preliminary injunction barring the rule that was limited to only the named plaintiffs.

The rule would have required employers to rescind existing noncompete agreements and actively notify workers that they are no longer in effect, except in the case of existing noncompete agreements for senior executives. New noncompete agreements were banned.

In its ruling, the court followed its earlier reasoning and held that the FTC exceeded its statutory rulemaking authority. The court found that the text, structure and history of the Federal Trade Commission Act shows that the agency can issue only “housekeeping” rules — rules concerning procedure and practice — regarding unfair methods of competition as opposed to substantive rules. This finding is further supported, the court said, by the FTC’s lack of any authority to impose penalties for violation.

‘Arbitrary and capricious’

The court also held that the rule was “arbitrary and capricious” in violation of the Administrative Procedure Act. The court concluded that the noncompete rule was unreasonably overbroad without a reasonable explanation. “The rule imposes a one-size-fits-all approach with no end date, which fails to establish a rational connection between the facts found and the choice made,” the court said.

“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.”

A federal district court in Florida had made similar findings this week, issuing an injunction against the rule on behalf of the plaintiff. However, a Pennsylvania court ruled in favor of the FTC, finding that the agency did have broad rulemaking authority. The question of whether the rule was arbitrary and capricious was not raised in that case.

Victoria Graham, an FTC spokesperson, said that the agency is disappointed in the ruling and is “seriously considering a potential appeal.” “Today’s decision does not prevent the FTC from addressing noncompetes through case-by-case enforcement actions,” she added.

Although the federal rule has been blocked, employers must still comply with an array of state laws governing the use of noncompete agreements.