A Texas federal court sets aside the FTC ban on worker non-competes nationwide before it takes effect

2024-08-20Trade Secrets

Ryan, LLC v. Federal Trade Commission, No. 3:24-cv-00986-E (N.D. Tex. Aug. 20, 2024) (Brown, J.), setting aside the Non-Compete Clause Rule, 16 C.F.R. Part 910, 89 Fed. Reg. 38342 (May 7, 2024)

The United States District Court for the Northern District of Texas granted summary judgment to Ryan, LLC and intervenors led by the Chamber of Commerce of the United States of America and set aside the Federal Trade Commission's Non-Compete Clause Rule, 16 C.F.R. Part 910, due to take effect September 4, 2024. The rule made it an unfair method of competition to enter into or enforce a non-compete clause with a worker, or to represent that a worker is bound by one, let existing clauses with senior executives earning at least $151,164 in policy-making positions stand, and superseded state laws that permit non-competes; the Commission estimated that about 30 million American workers, one in five, are bound by one. Judge Ada E. Brown held that Section 6(g) of the Federal Trade Commission Act is a housekeeping provision conferring no substantive rulemaking authority over unfair methods of competition, so the Commission exceeded its statutory authority, and that the rule is arbitrary and capricious because it imposes "a one-size-fits-all approach with no end date," offers no evidence for a categorical ban "instead of targeting specific, harmful non-competes," and fails to address alternatives. Because setting aside agency action under Section 706 of the Administrative Procedure Act has "nationwide effect" and is "not party-restricted," the rule "shall not be enforced or otherwise take effect on September 4, 2024, or thereafter."

What it changesNothing changes today in the employment agreements of a machine learning team: a non-compete remains enforceable to the extent the governing state's law allows, and the Commission may appeal. What the episode exposes is how much model know-how was protected only by a covenant that a federal rule came within fifteen days of making unenforceable. The rule itself contains a finding that "Employers Have Alternatives to Non-Competes for Protecting Valuable Investments," addressed to trade secret law and nondisclosure agreements, and those are the instruments to audit now. Invention assignment agreements should capture conception during employment and require disclosure of work in progress before an engineer leaves. The trade secret program should name the training recipes, data pipelines and evaluation harnesses that matter and record the access controls on each. And the mechanisms an engineer could rebuild for a competitor from memory belong in patent applications, which protect them whatever becomes of the restrictive covenant. The decision is a single district court's.