• On July 3, 2024, a federal judge concluded in Ryan LLC v. Federal Trade Commission that the Federal Trade Commission’s Final Rule banning nearly all employee non-compete agreements is likely unenforceable and preliminarily enjoined the FTC from implementing or enforcing the Rule against the parties in that case.
• The court declined to issue a broader injunction for now, instead limiting its order to the parties in Ryan.
• Accordingly, for the moment, and for everyone other than those parties, the Rule remains on track to take effect on September 4, 2024. However, the court in Ryan or another federal court that is expected to rule shortly in a different case considering similar issues may yet issue a broader injunction before the effective date.
• Employers should evaluate their current and future use of non-competes in light of the pending court challenges, monitor further case developments carefully, and prepare to issue the notices required by the Rule if it takes effect as currently scheduled.

In April 2024, the Federal Trade Commission (“FTC” or the “Commission”) announced a Final Rule that would prohibit nearly all existing and future non-compete agreements between employers and workers, subject to specified exceptions for “senior executives.”¹ This Rule is scheduled to take effect on September 4, 2024. On July 3, 2024, Judge Ada Brown of the United States District Court for the Northern District of Texas found that the Rule is likely invalid and issued a preliminary injunction barring implementation and enforcement of the Rule against the named plaintiffs in the case. Judge Brown has stated that she intends to issue a final decision in the case by August 30, 2024.

Because the preliminary injunction applies only to the specific parties in the case, the Final Rule is still on track to take effect for all other employers. However, this court or another court may issue an injunction applicable more broadly before then. And appeals are likely. Accordingly, the future of the Final Rule is far from settled. Dechert will continue to issue updates as developments occur.

Overview of the Final Rule and Court Challenges

Under the Final Rule, for-profit employers will be prohibited from entering into a “non-compete clause” with all “workers,” regardless of role, and non-competes previously entered into will be deemed void and unenforceable except for “senior executives.” The Rule defines senior executive narrowly as an employee who earns more than $151,164 annually and is in a “policy-making position.” The Rule defines “non-compete clause,” “employment” and “worker” broadly and prohibits both explicit non-compete agreements and all agreements that have the effect of “penalizing” employees for seeking or accepting employment after leaving an employer. The Rule contains an exception for non-competes entered into pursuant to “a bona fide sale of a business entity, of the person’s ownership interest in a business entity, or of all or substantially all of a business entity’s operating assets,” although the precise contours of this exception are unclear.

The Final Rule is set to take effect on September 4, 2024.

Numerous court challenges to the Rule were quickly filed, including an action in the United States District Court for the Northern District of Texas by accounting firm Ryan LLC, Ryan LLC v. Federal Trade Commission, Civil Action No. 3:24-CV-00986-E (N.D. Tex.), and a suit in the Eastern District of Texas by the Chamber of Commerce of the United States and other business groups. The Chamber of Commerce’s case was stayed in favor of Ryan LLC’s prior filing, and the Chamber subsequently intervened in that case. A suit was also filed in the United States District Court for the Eastern District of Pennsylvania by ATS Tree Services LLC and the Pacific Legal Foundation.

The plaintiffs in these cases challenged the legality of the Final Rule on numerous grounds, including that the FTC lacked authority to issue regulations with respect to unfair methods of competition under Section 6(g) of the Federal Trade Commission Act (the “FTC Act”).

The Ryan Court’s Decision

The court in Ryan found that the plaintiffs are likely to succeed on the merits of their claim that the Final Rule is invalid, on two grounds: (1) the FTC lacks statutory authority to promulgate the Rule, and (2) the Rule is arbitrary and capricious. As stated in the court’s opinion, the Final Rule’s “expansive ban” on virtually all non-competes is “unreasonably overbroad…without a reasonable explanation.” The court found that “the Rule is based on inconsistent and flawed empirical evidence, fails to consider the positive benefits of non-compete agreements, and disregards the substantial body of evidence supporting these agreements.”

Judge Brown also concluded that the Final Rule presents a risk of irreparable harm to the plaintiffs, who would incur “nonrecoverable costs” in complying with the Rule’s written notice obligations. The court further held that the final injunction factors—public interest and the balance of harms—supported an injunction because “[t]he Rule makes unenforceable long-standing contractual agreements that have been judicially recognized as lawful and beneficial to the public interest” and “prevent[s] the substantial economic impact of the Rule, while simultaneously inflicting no harm on the FTC.”

Notably, however, Judge Brown limited the preliminary injunction to the plaintiffs in the case. As is common in cases challenging regulatory action, the plaintiffs requested that the court enjoin implementation of the Final Rule “nationwide,” i.e., enjoin the government from implementing the Rule with respect to all persons in the United States, and not just the parties. Similarly, the plaintiffs-intervenors requested relief on behalf of all members of their association throughout the country. The court declined to grant this relief, for now, stating that the Plaintiffs and intervenors had offered virtually no briefing or basis for extending the injunction to non-parties.

What’s Next

The Ryan court’s decision was a preliminary injunction, not a final decision on the merits. The court stated that it intends to issue its final decision by August 30, 2024. Given the preliminary injunction, it appears likely that the court will find the Final Rule to be invalid and unenforceable. Moreover, the court has invited further briefing from the parties, which will likely provide the court with the briefing it said it was lacking on the nationwide scope of the injunction. Hence, the court may well decide by August 30, 2024 to bar implementation and enforcement of the FTC Rule as to all employers in the U.S., and not just the parties in the Ryan case. In addition, the federal court in Pennsylvania has scheduled a hearing on the plaintiffs’ motion for a nationwide preliminary injunction in that case on July 10, 2024, and has stated that it will rule on the request by July 23, 2024.

Accordingly, the Rule may or may not go into effect as to all employers across the country on September 4, 2024. A nationwide, injunction would bar implementation and enforcement of the Rule until the virtually inevitable appeal by the FTC is decided.

Action Items for Employers

The court’s decision in Ryan provides some encouragement for employers who use non-competes. The court held that the plaintiffs are likely to prevail on their claim that the FTC’s Final Rule is invalid. The court also invited briefing on the issue of whether to extend the invalidation to employers other than the parties. Either or both of the court rulings expected in Pennsylvania by July 23 and in Texas by August 30 may enjoin implementation and enforcement of the Rule as to all employers. However, because the temporary relief ordered by the court in Ryan applies only to the specific parties in the case, the Rule remains on track to become effective in September as to all employers except the parties in the Texas case, at least for now.

Accordingly, employers will need to monitor future developments in both cases while preparing for the possibility that the Rule will go into effect on September 4.

Employers should determine which agreements they have with current and former employees may be invalidated by the Rule and prepare a contingency plan for giving the required notice to those individuals by September 4.

Further, given the uncertainty surrounding the Rule and the clear trend at the state level toward closely scrutinizing the use of non-competes, employers should consider whether their current restrictive covenants are sufficiently narrow and whether their interests can adequately be protected using covenants other than non-competes, such as robust non-solicits and non-disclosure agreements, modified incentive vesting structures, and garden leave clauses. This includes companies engaged in sale transactions who seek to impose non-competes on sellers or others who may be acquiring equity in connection with the transaction. In addition, employers looking to impose non-competes on “senior executives” should consider entering into them where possible before September 4, 2024.

¹ As covered in our previous OnPoint (April 24, 2024), under the Rule, non-competes entered into prior to the effective date will be deemed void and unenforceable unless the employee bound by the agreement is a “senior executive.” Following the effective date, a for-profit employer may not enter into a non-compete with a worker, including a “senior executive.”