The Federal Trade Commission’s (“FTC”) efforts to ban non-compete agreements was significantly curtailed when a federal judge in Texas, on August 20, 2024, issued a nationwide injunction, finding the FTC’s ban on non-compete agreements unlawful.
On April 23, 2024, the FTC passed a final rule to ban most non-compete clauses in employment agreements, finding such agreements to be unfair methods of competition (the “FTC Rule”). The FTC Rule was slated to have an effective date of September 4, 2024.
However, on August 20, 2024, the United States District Court for the Northern District of Texas granted summary judgment to the plaintiff in Ryan LLC v. FTC, enjoining the FTC from implementing and enforcing its Rule. As a consequence of this decision, the FTC Rule will not take effect and cannot be enforced for the foreseeable future.
Since the FTC Rule was passed, it has been subject to various legal challenges which are still being litigated. Three separate preliminary injunction decisions were issued prior to the August 20, 2024 decision barring the FTC Rule nationwide.
- The Ryan LLC v. FTC action was the first challenge filed and the first to rule on a preliminary injunction motion. On July 3, 2024, the court granted a preliminary injunction preventing the FTC Rule from being enforced, but only as to the plaintiff, Ryan LLC, and Plaintiff-Intervenors. As a result, the decision did not have a nationwide impact.
- Subsequently, on July 23, 2024, a federal court in Pennsylvania sided with the FTC and denied a preliminary injunction to enjoin the FTC Rule from taking effect. The court there found the opposite of the Ryan court, stating that the Plaintiff had not shown a likelihood of success, setting out a detailed discussion of the FTC’s authority to promulgate such Rule. ATS Tree Services v. FTC et al, 24-cv-1743, D.I 80 (E. D. Pa. July 23, 2024). Although this decision was on a preliminary injunction basis, and a final decision on the merits is still pending, the court previewed its position that the FTC exercised its valid authority to pass the FTC Rule.
- On August 14, 2024, in another challenge to the FTC Rule, a federal judge in Florida sided with the Ryan LLC court and granted a preliminary injunction to stay the effective date of the FTC Rule, applicable only to the plaintiff. Properties of the Villages, Inc. v. FTC, 24-cv-316, D.I. 59 (M.D. Fla. Aug. 14, 2024). Like in Ryan LLC, the court in Properties of the Villages, Inc. found, on preliminary injunction standards, that the plaintiff was likely to succeed on the merits of its argument that the FTC Rule was beyond the FTC’s authority, therefore, unlawful. This decision too, however, did not have a nationwide impact.
These inconsistent and limited preliminary injunction decisions caused uncertainty for employers, not knowing whether or not their non-compete agreements would be enforceable and what actions they would be required to take pursuant to the FTC Rule.
Ultimately, on August 20, 2024, the Ryan, LLC court issued the first summary judgment decision on the merits, applying a nationwide effect of enjoining the FTC Rule. The court there found that the FTC exceeded its statutory authority in promulgating the FTC Rule and that the Rule is “arbitrary and capricious.” Ryan, LLC. v FTC, 24-cv-986, D.I. 11 at 26 (N.D. Tex. Aug. 20, 2024). As a result, the court held that the Rule was unlawful and must be set aside.
Now, based on this ruling, employers have some clarity and certainty for the foreseeable future that the FTC Rule cannot render their non-compete agreements unenforceable and they do not have to take the actions set out by the FTC Rule.
The battle over the enforceability of non-compete agreements is far from over, however, as the August 20, 2024 decision is appealable and litigation is still ongoing in other challenges. The FTC will almost certainly appeal the decision to the Fifth Circuit Court of Appeals. There will likely be a further appeal to the Supreme Court of the United States until a final, non-appealable, judgment is rendered on the FTC’s authority to promulgate such a rule.
Further, despite the injunction on implementing the FTC Rule, the FTC indicated an intent to keep fighting to stop non-competes as the August 20, 2024 decision does not prevent the FTC from addressing non-compete agreements on a case-by-case enforcement action.
What does this mean for employers?
Although the FTC Rule has been blocked for the time being, it has raised significant attention on non-compete agreements in an already evolving landscape of state legislation and/or judiciaries scrutinizing or limiting the enforceability of such agreements. It is prudent for employers to evaluate their existing agreements and practices moving forward. Employers should tailor employment agreements to comply with the applicable state laws and judicial opinions governing restrictive covenants such as non-compete agreements.
