A federal judge in Texas struck down a U.S. Federal Trade Commission rule that would have prevented U.S. employers from enforcing most existing noncompete clauses and requiring new workers to sign noncompete clauses as a condition of employment. U.S. District Judge Ada Brown wrote in her ruling, issued August 20, 2024 that the federal agency exceeded its statutory authority when it approved the ban and the noncompete rule is “arbitrary and capricious.”
“The court concludes that the FTC lacks statutory authority to promulgate the noncompete rule, and that the rule is arbitrary and capricious,” wrote the judge. “Thus, the FTC’s promulgation of the rule is an unlawful agency action.”
The FTC issued the final rule on April 23, 2024. It would have banned for-profit employers from entering into new noncompetes with anyone and would have made most existing agreements unenforceable after September 4, 2024.
The FTC estimated that 30 million Americans, or about one in five U.S. workers, had been subject to noncompete agreements prohibiting change of employment to immediate competitors or starting competing businesses within the employer’s designated market. Orthodontists are among workers who have signed noncompetes, as some orthodontic employers have required them as conditions of employment.
Noncompete agreements may now continue to be used for incoming employees and existing noncompetes may be enforced. It is not known whether the FTC will appeal Judge Brown’s ruling. If that occurs, an emergency order could be imposed to put the rule into effect pending the outcome of the appeal.
