The Federal Trade Commission’s Final Rule banning non-competes will not take effect on September 4, 2024. On August 20, 2024, U.S. District Judge Ada Brown for the Northern District of Texas ruled on the merits of the challenge to the Final Rule in Ryan, LLC v. FTC, No. 3:24-cv-00986, finding that the FTC lacks authority to create substantive rules pertaining to unfair methods of competition, and that the Rule is arbitrary and capricious. The Court found that the Rule’s “one-size-fits-all approach with no end date, [] fail[ed] to establish a ‘rational connection between the facts found and the choice made.’”  The judge reasoned that the FTC’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.”

As such, the Court held that the Rule is unlawful and must be set aside. Further, the Court held that setting aside agency action under the Administrative Procedure Act (APA) has “nationwide effect” rejecting the FTC’s argument that the Court’s ruling should be restricted to the parties before it. Having set aside the Rule, the Court held that the Rule may not be enforced or otherwise take effect on September 4, 2024. 

The Northern District of Texas was the first to rule on the merits of a challenge to the Rule. However, two other Judicial District have weighed in on preliminary motions.  On August 14, 2024, U.S. District Judge Timothy Corrigan of the Middle District of Florida granted a temporary injunction banning enforcement of the Rule against the named plaintiff in Properties of the Villages, Inc. v. FTC, No. 24-cv-00315. Aligned with the Northern District of Texas, Judge Corrigan found that the FTC’s Final Rule implicated the “Major Questions Doctrine,” requiring that a federal administrative agency “point to clear congressional authorization for the power it claims” when it “claims to have the power to issue rules of extraordinary economic and political significance.” The Court found the Doctrine applicable because the FTC’s Rule significantly impacts the American economy, regulates an area that was previously under the domain of state law, and significantly expands the agency’s regulatory authority, where there was no clear congressional authorization for the claimed power. 

Earlier on July 23, 2024, and in contrast to Texas and Florida, U.S. District Judge for the Eastern District of Pennsylvania Kelly Brisbon Hodge denied a plaintiff’s motion for stay and preliminary injunction against the effect and enforcement of the Final Rule in ATS Tree Services, LLC v. FTC, No. 24-cv-1743. The Pennsylvania Court found that the plaintiff failed to establish irreparable harm despite alleging its non-recoverable costs of compliance with the Rule and the loss of contractual benefits. Further, the Court ruled that even if the plaintiff could establish irreparable harm, it showed no likelihood of success on the merits because the FTC has authority to take actions like rulemaking to avoid harm before it occurs. Finally, the Pennsylvania Court explicitly found that the Major Questions Doctrine was not implicated because the FTC had previously used its Section 6(g) rulemaking authority to promulgate substantive rules, and because the Court viewed the Final Rule as “fall[ing] squarely within [the FTC’s] core mandate” to prevent unfair methods of competition. 

As the FTC considers its next steps, it remains cognizant of its ability to address non-competes through case-by-case enforcement actions, something the FTC could and did do before promulgating the Final Rule. Whether through an appeal of Ryan or some other vehicle, the FTC’s Final Rule banning non-competes is likely to come before the U.S. Supreme Court. While the Supreme Court retains discretion to not hear the matter, its recent decision in Loper Bright Enterprises v. Raimondo, No. 22–451, 603 U.S. __ (2024) overturning the long-standing “Chevron deference” requiring courts to give deference to an agencies’ statutory interpretations where congressional intent is not clear, suggests that the Supreme Court may accept jurisdiction. The Court will likely resolve whether Section 6(g) provides the FTC the authority to promulgate substantive rules, especially those having substantial nationwide economic impacts that essentially eviscerate long-standing state laws and private party contracts. The Court will also likely address the debate over whether a federal district court has the authority to grant relief beyond the parties before it. In a 2023 concurring opinion, Justice Gorsuch expressed his disapproval of courts granting such universal relief.  In United States v. Texas, 599 U.S. 670 (2023), Justice Gorsuch questioned whether “set aside” as used in Section 706 means vacating agency action when that relief nowhere appears in the APA. He noted that Section 706 does not address remedies, but rather, addresses a court’s standard of review. Further, while Section 703 does prescribe available remedies, it does not include a remedy of vacatur. Justice Gorsuch recognized, however, that the question is not “open and shut,” and essentially cautioned district courts to “think twice . . . before granting such sweeping relief” suggesting that “an extraordinary remedy like vacatur would demand truly extraordinary circumstances.” 

What does this mean for businesses who use non-compete agreements and other restrictive covenants to protect their trade secrets, intellectual property and other confidential, proprietary information? In the words of Justice Gorsuch, the question is not “open and shut.” For now, the FTC Rule will not take effect on September 4, 2024, but the FTC is likely to challenge this decision. Businesses should review their current contractual provisions to ensure they are sufficiently tailored to protect their legitimate business interests. Restrictive covenants should be reasonably tailored to address the information being protected and that information should be worthy of being protected by post-employment restrictions.  They should also be reasonable in scope for both time and geographic region. Provisions that are overly broad in application are subject to being struck down under exiting Florida law. 

As for Justice Gorsuch’s concerns about district courts rendering rulings that have universal impact?  Perhaps in this instance, given the broad sweeping impact of the FTC Rule as it currently reads, a nationwide vacatur was truly justified.