As we previously reported, the Federal Trade Commission (FTC) finalized a rule in April that would prohibit non-competes in most contexts, and was slated to go into effect on September 4, 2024.  Businesses and business groups then filed multiple lawsuits to block the rule.  Yesterday, one of those lawsuits was successful, and the rule is now completely blocked nationwide. 

In Ryan, LLC v. FTC (Northern District of Texas),1 a Texas-based tax firm and the US Chamber of Commerce asserted that the FTC lacked legal authority to ban non-compete agreements through rulemaking.  On July 3, 2024, the court preliminarily blocked the rule, but only as it applied to the original plaintiff and several other firms that had joined the suit.   

In yesterday’s decision, completely blocking the rule for the first time, Judge Ada Brown of the Northern District of Texas concluded that by passing a substantive rule defining unfair competition, the FTC exceeded its statutory authority granted by Congress.  The court also concluded that the rule was arbitrary and capricious because the FTC had failed to adequately explain why a blanket ban on non-competes was necessary (as opposed to more targeted limitations on these agreements, as many states have adopted). 

Having concluded that the rule exceeded statutory authority and was arbitrary and capricious, the court stated that the rule “shall not be enforced or otherwise take effect on its effective date of September 4, 2024, or thereafter.” 

This ruling brings the litigation in the Northern District to a close.  An FTC spokesperson stated that the Commission was “seriously considering” a potential appeal, which would bring the issue before the Fifth Circuit Court of Appeals.  Because the Fifth Circuit is one of the most conservative appeals courts in the country (and because the Supreme Court’s Loper Bright decision recently dealt a blow to agency deference) the government likely faces an uphill battle on appeal.  However, a Pennsylvania court recently upheld the rule in a preliminary ruling, a signal that the legality of the rule is not so clear cut. 

This decision grants employers a welcome reprieve from having to hastily retool their employee agreements (and notify current and former employees of this change) right after Labor Day.  However, the fate of the rule may ultimately rest with appeals courts (or the Supreme Court).  In the meantime, non-competes and related agreements will continue to be governed by varying state laws, including some recent laws that have cracked down on these agreements (such as Minnesota’s ban on non-compete agreements which went into effect on July 1, 2023).  These myriad laws can pose a challenge for multi-state employers that rely on non-compete agreements to protect their goodwill and trade secrets. 

As always, stay tuned to HR Legalist for updates regarding non-compete agreements and other employment law topics. 

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