FTC Ban on Non-Competes Is Blocked — For Now

Back in April 2024, the Federal Trade Commission (FTC) issued a final rule that would have banned non-compete agreements nationwide as of September 4, 2024. (You can read our alert on the FTC’s final rule here.) However, on August 20, 2024, in the case Ryan LLC v. FTC, a federal district court in Texas issued a permanent injunction blocking the FTC’s final rule from going into effect on September 4. This followed the same court’s preliminary ruling in July that offered limited, temporary relief from the rule for plaintiffs only. In its August 20 ruling, the federal court made it clear that the injunction would be permanent and apply nationwide. However, litigation over the rule is pending in other jurisdictions, and the FTC has said that it is considering an appeal of the Texas district court decision. Thus, employers should proceed with non-competes with caution.

FTC Non-Compete Final Rule

Under the FTC’s Final Non-Compete Clause Rule, employers would have been banned from entering into or attempting to enforce any new non-compete agreements against workers after September 4. Additionally, existing non-competes for the vast majority of workers, except for senior executives, would no longer have been enforceable, and employers would have been required to provide notice to these workers that they would no longer be enforcing any noncompete covenants against them. The FTC asserted that it had authority to issue the final rule pursuant to powers granted to the agency under the FTC Act, including the power to prevent unfair methods of competition.

Texas District Court Ruling

In the August 20 ruling, U.S. District Judge Ada Brown set aside the FTC’s final rule, declaring that it would “not be enforced or otherwise take effect on September 4, 2024, or thereafter.” With frequent references to Loper Bright, the recent U.S. Supreme Court decision overturning the longstanding Chevron doctrine of judicial deference to federal agencies (you can read our alert on Loper here), Judge Brown asserted that the FTC was incorrect in interpreting the FTC Act as expressly granting the agency authority to promulgate substantive rules to regulate unfair methods of competition. Judge Brown concluded that the FTC’s final rule was an “unlawful agency action” because the FTC “lacks statutory authority to promulgate the Non-Compete Rule,” and the rule itself is “arbitrary and capricious.”

Takeaways

As a result of the latest court ruling, employers may cautiously continue lawful practices with respect to non-compete agreements, subject to any state restrictions that may apply. However, employers should be aware that the FTC intends to appeal the Texas federal court’s decision, and conflicting decisions in other federal courts may lead to a circuit split, with either pathway potentially leading to U.S. Supreme Court review. The FTC has expressed that it would also continue to address non-compete issues through “case-by-case” enforcement actions. Thus, the debate over non-competes is far from over.

We will continue to monitor and provide updates on ongoing litigation regarding the FTC non-compete rule. Please contact a Franczek attorney with any questions.