• On August 20, 2024, a federal district court in Texas issued a permanent injunction blocking the Federal Trade Commission’s “Non-Compete Rule,” which would have prohibited nearly all non-compete clauses with workers.

• The court order applies nationwide and is not limited to the parties in the case. Accordingly, at least for now, employers are not required to issue the notices which the Non-Compete Rule would have required, nor are they required to otherwise comply with the Rule.

• However, the Federal Trade Commission announced that it is “seriously considering a potential appeal” while emphasizing that the decision does not prevent it from addressing the effects of non-competes on workers “through case-by-case enforcement actions.

On August 20, 2024, the United States District Court for the Northern District of Texas issued a permanent injunction blocking the Federal Trade Commission’s (“FTC”) “Non-Compete Rule” that would have placed a nationwide ban on nearly all non-compete clauses with workers.¹ Judge Ada Brown had previously enjoined enforcement of the Non-Compete Rule as to the named plaintiffs,² but the new ruling sets aside the Non-Compete Rule completely, blocking enforcement nationwide. This decision provides considerable relief to employers, who had potentially faced invalidation of existing non-compete agreements with most workers as well as a prohibition on future non-compete agreements and onerous notice requirements. The issue may now head to the Court of Appeals for the Fifth Circuit and, potentially, the U.S. Supreme Court thereafter. In the short term, the FTC may seek an emergency stay to halt Judge Brown’s ruling pending these appeals, although any such stay is unlikely to be granted.

As explained in a previous Dechert OnPoint,³ the Non-Compete Rule, which was set to become effective on September 4, 2024, would have prohibited for-profit employers from entering into a “non-compete clause” with all “workers,” regardless of role. It also would have invalidated all existing non-competes except for those of “senior executives.” In Ryan LLC v. Federal Trade Commission, the plaintiffs challenged the Non-Compete Rule under the Administrative Procedure Act (“APA”) and the Declaratory Judgment Act. In finding the rule to be invalid, the Ryan court focused on the argument that, under the APA, (i) the FTC lacks statutory authority to promulgate the Non-Compete Rule, and (ii) the Non-Compete Rule is arbitrary and capricious.

Considering the text, structure, and history of the Federal Trade Commission Act (the “FTC Act”), the court agreed with the plaintiffs that Section 6(g) of the FTC Act does not authorize the FTC to issue substantive rules regarding unfair methods of competition, meaning the FTC exceeded its statutory authority in promulgating the Non-Compete Rule. The court relied on the plain text of the statute as well as the fact that “from 1978 to the announcement of the [Non-Compete Rule], the [FTC] did not promulgate a single substantive rule under Section 6(g)” (emphasis in original).

The court also concluded that the Non-Compete Rule is arbitrary and capricious, for two primary reasons. First, the court found that the Rule was not supported by the factual record before the FTC. Noting that no state has enacted a prohibition as broad as the Non-Compete Rule, the court concluded that, “[t]he Commission’s lack of evidence as to why they chose to impose such a sweeping prohibition—that prohibits entering or enforcing virtually all non-competes—instead of targeting specific, harmful non-competes, renders the Rule arbitrary and capricious.” Second, the court found that the FTC did not properly consider alternatives to the Non-Compete Rule and instead “dismissed any possible alternatives, concluding that either the pro-competitive justifications outweighed the harms, or that employers had other avenues to protect their interests.”

The court ruled that the FTC had engaged in “unlawful agency action” under the APA by promulgating the Non-Compete Rule. The court rejected the FTC’s argument that enforcement of the Non-Compete Rule should be enjoined only as to the named plaintiffs, because “the APA does not contemplate party-specific relief.” Accordingly, the court ordered that “[t]he Rule shall not be enforced or otherwise take effect on its effective date of September 4, 2024, or thereafter.”

Practical Implications

This decision is a significant blow for the FTC and a welcome reprieve for employers. Although the FTC maintains the power to consider non-compete agreements through case-by-case enforcement actions, its near-total ban on non-competes is not enforceable, for now. The FTC may appeal to the Fifth Circuit and may also seek an emergency stay of the ruling pending appeal. A federal court in Pennsylvania has refused to enjoin the Non-Compete Rule and a federal judge in Florida has enjoined the Rule as to the parties in that case; those decisions have no effect on yesterday’s ruling by the court in Texas, but could increase the likelihood of eventual Supreme Court review.

At least for now, companies can continue to rely on existing non-compete agreements, and enter into new non-compete agreements, in accordance with applicable state law. However, many courts applying state law have been increasing scrutiny on non-competes and other restrictive covenants. Employers therefore should monitor developments in jurisdictions relevant to them, consider choice of law and choice of forum clauses accordingly, and ensure that their restrictive covenants are narrowly tailored to protect employers’ valid business interests and are reasonable in duration, geographic reach, and scope of restrictive activity. Employers can also consider adopting garden leave agreements, non-solicitation agreements, and other alternatives to non-competes.

1. Ryan LLC, et al. v. Fed. Trade Comm’n, No. 3:24-cv-00986-E (N.D. Tex. Aug. 20, 2024).
2. Ryan LLC, et al. v. Fed. Trade Comm’n, 2024 WL 3297524 (N.D. Tex. July 3, 2024).
3. See Dechert OnPoint, “Federal Court Preliminarily Enjoins FTC Ban on Employee Non-Compete Agreements, But Not for the Vast Majority of Employers,” available here.