Employers concerned about the enforceability of restrictive covenants can breathe a little easier for now. A Texas federal court has blocked the Federal Trade Commission’s (“FTC’s”) final rule banning non-compete agreements (the “Non-Compete Ban” or “Ban”), which was set to take effect on September 4, 2024. As a result, the Ban will not be implemented as planned, and employers are not required to comply with its provisions. Instead, restrictive covenants, including non-compete agreements, will continue to be governed by applicable state law.

Non-Compete Ban Background

As outlined in our previous client alert, the FTC’s Non-Compete Ban would have prohibited employers from using non-compete agreements with workers (employees and independent contractors), except in very limited circumstances, such as agreements with “senior executives” (employees earning at least $151,164 annually and in policy-making positions) or in connection with the bona fide sale of a business entity.

Several legal challenges have arisen against the Ban, resulting in the following outcomes:

• ATS Tree Services, LLC v. FTC: The Eastern District of Pennsylvania denied an employer’s request for a preliminary injunction, affirming that the Ban falls within the FTC’s authority and promotes fair competition.
• Properties of the Villages v. FTC: The Middle District of Florida granted a preliminary injunction for the employer, delaying the Ban’s effect for the employer.  The court found a strong likelihood that the Ban violates the major questions doctrine due to its unprecedented nature and significant legal issues, although the employer’s argument on the FTC’s statutory rulemaking authority was less convincing.

Ryan LLC v. Federal Trade Commission

 One legal challenge has successfully halted the Non-Compete Ban. In Ryan LLC v. FTC, the plaintiffs—Ryan, LLC, the U.S. Chamber of Commerce, and other trade organizations—sought a nationwide stay of the Ban, arguing that (1) the FTC acted beyond its statutory authority, (2) the Ban was an unconstitutional exercise of power, and (3) the FTC’s actions were arbitrary and capricious.

Prior to deciding this matter on its merits, on July 3, 2024, the Northern District of Texas granted the plaintiffs’ motion for a stay and preliminary injunction, delaying the Ban’s effective date for the plaintiffs.

On August 20, 2024, the Court ruled on the merits, blocking the Ban. The Court found that the FTC exceeded its statutory authority and lacked the power to create substantive rules through its approach. Specifically, the Court stated that upon reviewing the text, structure and history of the Administrative Procedure Act (“APA”) – the federal statute that establishes the rules and procedures for federal agency rulemaking and allows federal courts to hold unlawful and set aside such rulemaking – that the FTC lacks the authority to create substantive rules through the method used by the FTC in relation to the Non-Compete Ban.

The Court also deemed the Ban “arbitrary and capricious” because (1) the FTC provided no evidence or reasoned basis supporting the categorical ban of non-competes, as opposed to targeting specific harmful and overly broad non-competes; and (2) the FTC failed to sufficiently address alternatives to issuing the categorical ban of non-competes, and instead dismissed any possible alternatives by concluding that either pro-competitive justifications outweighed the harms or that employers had other avenues to protect their interests.

As a result, the Court set aside the Non-Compete Ban, preventing it from taking effect on September 4, 2024.

Looking Ahead

 The Ryan decision is a significant win for employers but does not mark the end of the debate regarding the enforceability of non-competes. The FTC may appeal the ruling to the Fifth Circuit, and ongoing litigation could lead to conflicting precedents. Additionally, the FTC might revise the Ban in response to the Court’s findings in Ryan and Properties of the Villages. Congress could also step in with new legislation on restrictive covenants.

In the meantime, employers are relieved from complying with the Non-Compete Ban. We continue to encourage employers to review their restrictive covenants, particularly non-compete clauses, to ensure compliance with applicable state laws. Currently, non-competes are banned in California, North Dakota, Oklahoma, and Minnesota, with state-level bans pending in Illinois, Kentucky, Massachusetts, and Michigan.  Many other states also have limitations on the use of non-competes or other restrictive covenants.