Court Invalidates FTC’s Noncompete Rule

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

Nationwide Injunction

As we previously discussed, in July, in Ryan LLC v. Federal Trade Commission, the U.S. District Court for the Northern District of Texas preliminarily enjoined the FTC from enforcing the FTC Rule against the plaintiffs in that case. In an opinion dated August 20, 2024, the court has now issued an injunction invalidating the FTC Rule on a nationwide basis (i.e., not limited to the plaintiffs in the case). The court held that the FTC exceeded its statutory authority under the Federal Trade Commission Act in promulgating the FTC Rule, finding that such Act does not grant the FTC substantive rulemaking authority with respect to unfair methods of competition (as opposed to mere “housekeeping” rulemaking authority with respect to agency procedure and practice, which the FTC has the power to promulgate). The court further held that the FTC Rule is “arbitrary and capricious” under the Administrative Procedure Act (which empowers a court to hold unlawful and set aside certain agency actions) because the rule is “unreasonably overbroad without a reasonable explanation” and “imposes a one-size-fits-all approach with no end date.” The court noted that the FTC failed to defend the “sweeping prohibition … instead of targeting specific, harmful non-competes.”[1]

Takeaways

As it stands today, the injunction means the FTC Rule will not take effect on September 4, 2024. While the FTC has indicated it will appeal the decision to the U.S. Court of Appeals for the Fifth Circuit to seek an emergency stay of the district court’s decision, it seems unlikely that any such stay would be issued before September 4. 

At this point, employers are not required to provide notice to non-senior executive employees rescinding noncompete agreements, nor are employers precluded from entering into non-competition agreements with new employees, as was contemplated under the FTC Rule. However, the FTC Rule saga continues, and employers separately need to continue to be mindful of, and monitor changes to, applicable state law. 

If you are interested in learning more about the FTC Rule, or have any questions about this alert, please contact the authors.

_{[1]Other federal district courts have ruled on challenges to the FTC Rule. On July 23, 2024, a Pennsylvania federal court in ATS Tree Services, LLC v. Federal Trade Commission found that the FTC Rule was within the FTC’s rulemaking authority and was consistent with FTC’s congressional mandate to prevent unfair competition practices. In addition, on August 14, 2024, a Florida federal court in Properties of the Villages Inc. v. Federal Trade Commission granted a preliminary injunction postponing the implementation of the FTC Rule only for the parties before the court. However, the Texas court’s issuance of a nationwide injunction on the FTC Rule in the Ryan case effectively supersedes these other rulings for the time being.}