Courts Divided on FTC Noncompete Ban

On April 23, 2024, the Federal Trade Commission (FTC) issued a final rule banning almost all noncompete agreements. The rule is currently set to take effect on September 4, 2024 and applies to all types of employing entities of all sizes. More on the rule here.

Challenges and Divided Courts

As expected, the FTC rule has faced immediate legal challenges and, not surprisingly, recent decisions reflect a divide among courts.  

In Ryan LLC v. Federal Trade Commission, plaintiff Ryan and other intervening plaintiffs sought an order from a federal court in Texas staying the FTC rule’s effective date and preliminarily enjoining the FTC from enforcing the rule.  In an opinion dated July 3, 2024, the U.S. District Court for the Northern District of Texas granted the plaintiffs’ motion, holding that the plaintiffs showed a likelihood of success on the merits of their claim that the FTC lacks substantive rulemaking authority with respect to unfair methods of competition, that the FTC rule is arbitrary and capricious, and that if the court did not grant the preliminary injunction, the plaintiffs would be irreparably harmed by the rule. Importantly, the court stayed the rule’s effective date only for the plaintiffs in that case, and did not grant nationwide relief. The court noted that it intends to rule on the ultimate merits of the case on or before August 30, 2024.

In ATS Tree Services, LLC v. Federal Trade Commission, plaintiff ATS Tree Services, in a federal court in Pennsylvania, similarly sought a stay of the FTC rule’s effective date and a preliminary injunction preventing enforcement of the rule. However, unlike the Ryan court, in an opinion dated July 23, 2024, the U.S. District Court for the Eastern District of Pennsylvania denied the plaintiff’s motion, holding that ATS was unable to establish either a likelihood of success on the merits of its claims (including that the FTC lacks substantive rulemaking authority and that the FTC exceeded its authority), or irreparable harm should the rule become effective on September 4, 2024.

We will likely see continued, differing approaches to legal challenges to the rule as courts sitting in different jurisdictions and hearing arguments from varying employers in varying industries grapple with the most broad-sweeping noncompete ban yet.[1]

Takeaways

Despite legal challenges, the rule is still set to take effect on September 4, 2024. We continue to closely monitor legal challenges to the rule.

Employers should continue to (i) identify individuals who are “senior executives” (those making at least $151,164 and who are in a policy-making position – i.e., a president or CEO, or an officer or equivalent who has final authority to make policy decisions that control significant aspects of the business) and who should enter into noncompete agreements before September 4, 2024 (as such agreements would be “grandfathered” even if the FTC's rule takes effect), (ii) review existing employment, restrictive covenant, and any form agreements to determine specific provisions that would no longer be enforceable after September 4, 2024 if the FTC's rule takes effect, (iii) be prepared to provide notice to non-senior executive employees and former employees by September 4, 2024 that any noncompete provisions will no longer be enforced, and (iv) consider other ways to protect company interests, like invention protection agreements, non-solicits, confidentiality provisions and training or bonus payback terms.

Further, states are increasingly disfavoring noncompetes, and some have enacted or are seeking to enact laws that would curtail or prohibit the use of noncompetes. So, even if the FTC’s rule is ultimately invalidated, employers need to be mindful of, and continue to monitor changes to, applicable state law. 

If you are interested in learning more about what the FTC’s rule will mean for your business, or have any questions about this alert, please contact the authors. 

Disclaimer: This alert is for general purposes and does not provide comprehensive or full legal advice. It is based upon public information available at the time of publication and is subject to change. 

^{[1] At least one additional case challenging the FTC rule is pending.  In Properties of the Villages, Inc. v. Federal Trade Commission, filed in the Middle District of Florida on June 21, 2024, a real estate company asked the federal court in Florida to enjoin the FTC rule, largely based on arguments similar to those made in the Texas and Pennsylvania cases. The briefing on that motion is ongoing but a decision is expected before the effective date of the FTC rule.}