Employers’ ability to legally enforce non-compete agreements was given a significant boost last week by a federal court in Texas, when a federal judge struck down the Federal Trade Commission’s (FTC) final rule that sought to prohibit non-compete agreements between employers and their employees. This means that the FTC’s rule banning non-compete agreements appears to be dead, at least for now.
In a previous article, we outlined the FTC’s final rule and the swift legal challenges seeking to prevent its implementation. In particular, we looked at a July 3, 2024 decision in Ryan LLC v. FTCwhere a federal court in Texas granted a motion for a preliminary injunction against the FTC’s final rule and temporarily stayed the non-compete agreement against the named plaintiff(s). Although the court’s original preliminary injunction only blocked implementation of the final rule on September 4, 2024 against plaintiff Ryan, LLC, our article assumed that the court in Ryan
could enact a more comprehensive, nationwide block on the FTC rule in the future.
This prediction came true last week. On August 20, 2024, the Ryan The court granted plaintiff’s motion for summary judgment and ruled that the FTC’s final rule should not be enforced or otherwise take effect on or after September 4, 2024. As the scales of justice seem to tip back and forth regarding the legality of non-compete clauses, we will analyze what the Ryan The court explained what impact this will have on employers in the future.
Ryan LLC v. FTC
Following the Ryan After the Court granted preliminary injunction, both parties filed motions for summary judgment regarding the adequacy of the FTC’s final rule. In the mutual motions for summary judgment, the primary issues before the Court were:
(i) whether the FTC was permitted to issue substantive rules on unfair competition practices, and
(ii) whether the blanket ban in the final rule was arbitrary and capricious.
On the first question, the Court focused on the statutory text of Sections 6(g) and 18 of the FTC Act, which grant the FTC certain legislative powers with respect to unfair competition practices. In analyzing the text, the Court found that the relevant statutory provisions do not contain any language regarding the legal consequences or “penalties” for non-compliance with FTC regulations. Therefore, the Court held that the FTC’s powers under Sections 6(g) and 18 are limited only to “These are “interpretive or procedural rules” and not substantive rule-making powers (i.e. no nationwide ban on non-compete agreements).
Next, the Court considered whether the FTC’s final rule was arbitrary and capricious. In rejecting the final rule, the Court overturned the “Lack of evidence as to why they chose to impose such a broad prohibition – prohibiting the conclusion or enforcement of virtually all non-compete agreements – rather than targeting specific, harmful non-compete agreements(.)” The court found that the FTC failed to demonstrate why such a “A “categorical ban” was necessary because it showed how different states handled the enforcement of non-compete agreements in different situations. The court also emphasized that the FTC had completely ignored some of the benefits of non-compete agreements. Overall, the court ruled that the FTC exceeded its statutory authority when it issued its final rule on non-compete agreements. The court ruled that the final rule could not be enforced or otherwise enacted against all employers in the United States.
What now for employers?
The big headline from the Ryan decision is that employers will no longer have to fight to ensure compliance with the FTC’s non-compete clause until September 4, 2024. Although litigation over the FTC’s final rule may not be over, as challenges may persist in other jurisdictions, employers can rely on the decision in Ryan to argue that their non-compete agreements were not per se unenforceable.
In addition, the legal options for challenging the FTC rule upheld in Texas are similar to several Supreme Court and federal court decisions that upheld the Chevron doctrine. For more information on the federal courts’ growing skepticism of administrative rulemaking and jurisprudence, see the links to our other articles below.
Finally, despite this victory for employers, there are still some restrictions on non-compete agreements imposed by state law and courts that employers need to be aware of. Several states have established wage limits at which an employer may restrict an employee’s ability to compete (e.g., Colorado, Illinois, Washington, Washington DC), and other states have banned non-compete agreements in employment contracts entirely (e.g., California, Minnesota, North Dakota, and Oklahoma).
If you have questions about best practices for drafting non-compete agreements or defending the enforceability of your non-compete agreements, please contact a member of Kelley Drye’s Labor and Employment team.
