Businesses will not need to comply with the Federal Trade Commission ban on noncompete agreements -- at least for now.
Judge Ada Brown from the U.S. District Court for the Northern District of Texas set aside the FTC noncompete ban Tuesday, meaning the rule will not be enforced by the Sept. 4 deadline imposed by the FTC. The ruling has a nationwide effect and is not limited to the plaintiff, tax firm Ryan LLC, or the U.S. Chamber of Commerce. The court determined that the rule was "arbitrary and capricious" under the Administrative Procedure Act, making it unlawful.
The practical effect here is that businesses and employers do not have to take any action based on the FTC rule, which is now nullified.
Joyce Ackerbaum CoxPartner and noncompete and trade secrets practice team co-leader, BakerHostetler
"The practical effect here is that businesses and employers do not have to take any action based on the FTC rule, which is now nullified, and should continue to follow the appropriate and applicable state laws that govern noncompetes," said Joyce Ackerbaum Cox, a partner at law firm BakerHostetler and co-leader of the firm's noncompete and trade secrets practice team.
Cox said it is unclear whether the FTC will appeal this decision. However, the FTC has faced legal challenges in Florida and Pennsylvania, and could choose to appeal given the favorable preliminary ruling it received in ATS Tree Services LLC v. Federal Trade Commission.
"The appellate rules would require any appeal to be filed 60 days after entry of the judgment or order appealed from, if one of the parties is a United States agency," Cox said.
What the ruling means for businesses
The FTC will likely appeal Brown's decision, something businesses will need to keep an eye on, said Jesse Coleman, a partner in commercial litigation at law firm Seyfarth Shaw.
"If they're at all interested in maintaining their effective date of Sept. 4, I think they'll move quickly," Coleman said of the FTC. "I don't think an FTC that was bold enough to take this action in the first place is simply going to give up at this stage. They knew what obstacles they were up against."
The ruling does assure businesses that the FTC rule is nonenforceable for the time being, he said. However, while the ruling makes the FTC's blanket ban unlawful, it doesn't stop the FTC from taking individual action against companies -- something Coleman said the FTC has done before. Businesses will also need to continue complying with state laws regarding noncompete agreements.
"This ruling doesn't affect the FTC's stated authority to go after individual companies and say, 'Your individual noncompetes are an unfair method of competition,'" Coleman said. "That's a separate authority under the FTC Act. What this court did was say, 'FTC, you can't pass a blanket rule that all noncompetes against workers are, per se, an unfair method of competition.'"
The U.S. Chamber of Commerce, intervenors in the Texas lawsuit against the FTC noncompete ban, applauded Brown's ruling.
"A sweeping prohibition of noncompete agreements by the FTC was an unlawful extension of power that would have put American workers, businesses, and our economy at a competitive disadvantage," Chamber President and CEO Suzanne Clark said in a statement.
Makenzie Holland is a senior news writer covering big tech and federal regulation. Prior to joining TechTarget Editorial, she was a general assignment reporter for the Wilmington StarNews and a crime and education reporter at the Wabash Plain Dealer.
