Update: FTC’s Ban on Non-Compete Agreements Set Aside

On May 7, 2024, the Federal Trade Commission (FTC) issued a Final Rule that renders invalid non-compete clauses in standard employment agreements. 16 C.F.R. § 910. On August 20, 2024, the United States District Court for the Northern District of Texas issued final judgment setting aside the FTC’s Final Rule. Although the court’s preliminary injunction limited its scope to the named plaintiffs, the court’s final decision will have nationwide effect and the FTC is enjoined from enforcing the Final Rule. Ryan, LLC v. FTC, No. 3:24-cv-00986, Slip Op. at 1 (N.D. Tex. Aug. 20, 2024).

As discussed in a previous alert, the FTC’s Final Rule would have imposed a nationwide and retroactive ban on non-compete clauses, requiring employers to notify their current and former employees to tell them that existing non-compete agreements are void. Although the regulatory objective was to improve competitive conditions for employees, the Final Rule would have had significant implications for companies whose competitive edge depends on protecting their trade secrets from unauthorized disclosure.

In Ryan, LLC v. FTC, a tax software and services company challenged the FTC’s authority to issue the Final Rule on multiple bases. Several associations, including the U.S. Chamber of Commerce, intervened. Plaintiffs challenged the FTC’s statutory authority to issue a substantive rule of this nature and raised constitutional challenges to the FTC’s authority. On July 3, 2024, the district court issued a preliminary injunction barring the FTC from enforcing the Rule against the named plaintiffs in the Texas suit. Although Plaintiffs sought a nationwide injunction, the court limited the preliminary injunction to just the named Plaintiffs. In doing so, the court observed that “Plaintiffs have offered virtually no briefing (or basis) that would support ‘universal’ or ‘nationwide’ injunctive relief.” Ryan, LLC v. FTC, No. 3:24-cv-00986, Slip Op. at 31 (N.D. Tex. July 3, 2024).

All parties then sought summary judgment on Plaintiff’s claims concerning the FTC’s Final Rule. In granting Plaintiff’s request for summary judgment, the district court concluded, “the FTC exceeded its statutory authority in implementing the Rule, and the Rule is arbitrary and capricious.” Ryan, LLC v. FTC, No. 3:24-cv-00986, Slip Op. at 14 (N.D. Tex. Aug. 20, 2024). As an appropriate remedy, the district court concluded that it “must ‘hold unlawful’ and ‘set aside’ the FTC’s Rule as required under [5 U.S.C.] § 706(2)” of the Administrative Procedures Act (APA). Slip Op. at 26. In rejecting the FTC’s request for the remedy to be limited to only the named Plaintiffs, the court noted, “the APA does not contemplate party-specific relief.” Id.

Practical Implications: The Viability of Non-Compete Clauses

Because the court concluded (i) that the FTC promulgated the Final Rule in excess of its statutory authority and (ii) that the Final Rule is arbitrary and capricious, the FTC Final Rule will not take effect on September 4, 2024. As a consequence, companies need not abide by the FTC’s Final Rule at this time.

This may change, however, as the FTC is expected to appeal the decision. We will monitor this issue and provide updates as they become available. For questions, please reach out to Sterne, Kessler, Goldstein & Fox, including the contacts on this alert.