The Decision
On Tuesday, August 20, 2024, employers throughout the country breathed a sigh of relief when a federal trial judge in Dallas struck down the FTC’s rule banning non-competes. It brought to a conclusion a tumultuous and chaotic summer that had turned employers and workers into court-watchers.
Background
On April 23, 2024, three members of the five-member Federal Trade Commission voted to issue a final rule (the “Non-Compete Rule”), which the FTC estimated would retroactively void 30,000,000 non-compete agreements throughout the country.
Scheduled to take effect on September 4, 2024, the Non-Compete Rule banned non-compete agreements, including any agreements that “function or prevent” a worker from seeking or accepting work or operating a business; made it unlawful to enter into, enforce, or attempt to enter into or enforce, a non-compete agreement with employees, independent contractors, interns, volunteers, or sole proprietors; and required companies to give written notice to workers that their non-competes were no longer enforceable.
It was arguably one of the most disruptive employment-related regulations issued in years and, ironically, was issued at a time when the Supreme Court was considering whether to narrow the scope of administrative authority in Loper Bright Enterprises v. Raimondo, which limited the degree of deference federal courts had to give to an agency’s reasonable interpretation of an ambiguous statute.
The Lawsuits
Shortly after the Non-Compete Rule’s issuance, lawsuits challenging its enforceability were filed, two in federal courts in Texas, one in Pennsylvania, and another in Florida. The parties in the Texas cases all ended up in the Northern District of Texas case, Ryan v. Federal Trade Commission, LLC. The plaintiffs in all the cases sought a nationwide preliminary injunction prohibiting the Non-Compete Rule from taking effect until a final ruling could be issued on the merits.
As the summer wore on, employers waited anxiously, wondering whether they would have to issue letters to workers abandoning their non-compete agreements (and, if so, when), while also grappling with the very real possibility they would have only a few days to get in compliance before the September 4th deadline.
On July 3, 2024, the Court in Ryan issued a preliminary injunction in favor of the plaintiff, Ryan, LLC, but stopped short of entering a nationwide injunction, stating it intended to issue a final ruling on the merits by August 30, 2024, less than a week before the Non-Compete Rule was scheduled to take effect.
The federal court in Pennsylvania weighed in on July 23, 2024, deciding the FTC had authority to issue the Non-Compete Rule, denying the plaintiff’s application for an injunction, and creating a conflict between the courts and confusion amongst employers trying to determine whether to prepare letters to their workers abandoning their non-competes.
On August 14, 2024, the Florida court found the Non-Compete Rule unenforceable but limited its preliminary injunction to the plaintiff in that case.
The Ruling
Finally, on Tuesday, August 20, 2024, ten days ahead of its own self-imposed deadline, the Court in Ryan issued its final ruling on the merits. In reaching its decision, the Court examined the Federal Trade Commission Act (the “FTC Act”), which created the FTC in 1914, Congress’s expansion of the FTC’s power in 1938 through the Wheeler-Lea Act, and the effect on both of the Administrative Procedure Act (“APA”).
In applying the APA, the Court found the FTC had not been given authority to create substantive rules regarding unfair methods of competition under Section 6(g) of the FTC Act. By issuing the Non-Compete Rule, the Court held the FTC had exceeded the authority delegated to it by Congress.
The Court also found the FTC’s decision was arbitrary and capricious because the Non-Compete Rule is “unreasonably overbroad without a reasonable explanation,” “imposes a one-size-fits-all approach,” is based on “inconsistent and flawed empirical evidence,” and failed to consider the benefits of non-competes or the evidence supporting the need for them. The Court specifically noted the FTC’s lack of evidence to explain why the FTC “chose to impose such a sweeping prohibition,” which forbids enforcing or entering into virtually all non-competes instead of targeting just those that were harmful.
The Court therefore held the Non-Compete Rule “shall not be enforced or otherwise take effect on its effective date of September 4, 2024, or thereafter.”
What It Means
The decision in Ryan means the Non-Compete Rule will not become effective on September 4, 2024, or thereafter, anywhere in the country, unless there is a successful appeal by the FTC.
What’s Next
The FTC is currently considering whether to appeal, but it is hard to imagine the FTC’s arguments receiving a warmer welcome in the Fifth Circuit Court of Appeals or the Supreme Court.
That is not to say things will return to the way they were, though. The Rule, if nothing else, brought an unprecedented amount of public attention and scrutiny to non-compete agreements. Just as the pandemic forced employers to face the reality of a workforce without offices, the Rule has forced all to consider the possibility of work relationships without restrictive covenants.
Some states have already taken steps to curtail the use of workplace non-competes. Minnesota, for example, banned workplace non-competes effective July 1, 2023, and New York came close to doing the same before Governor Kathy Hochul vetoed the bill in December. Other states, like Indiana, have taken steps to ban non-competes in certain narrow circumstances.
We could also see federal legislation on non-compete agreements or a movement to encourage states to adopt a uniform non-compete act, as we did with the Uniform Trade Secrets Act, but regardless of what happens, we will likely not look at non-competes the same way we did before.
