Employment Law Report
Federal Judge Blocks FTC’s Final Rule Banning Non-Compete Agreements
By: Matthew L. Bunnell
As we first reported in April, the Federal Trade Commission issued a comprehensive regulation, referred to as the Non-Compete Clause Rule or Final Rule, barring the enforcement of nearly all existing non-compete covenants after September 4, 2024. Not surprisingly, the Final Rule was met with several legal challenges that yielded mixed results. For example, in Ryan LLC v. Federal Trade Commission, the United States District Court for the Northern District of Texas issued a limited preliminary injunction that preliminarily enjoined enforcement of the Final Rule against the plaintiffs in that case. Several weeks after this decision, a federal court in Pennsylvania issued a contradictory opinion that declined to award an injunction.[1] Then, on August 14, a Florida federal court issued an opinion that sided with the Texas court’s approach by entering a limited preliminary injunction to the parties in the case.[2]
This mixed bag of jurisprudence left many employers at a crossroads: with the Final Rule’s effective date rapidly approaching, should they notify their employees of the purported invalidity of their non-competition covenants even though a final judgment had not been entered in the above cases? Employers now have an answer to that question because the Texas federal court that first examined this issue entered an order on August 20 that enjoins the Final Rule as to all parties nationwide, meaning that the Final Rule will no longer take effect as presently scheduled absent some change or challenge otherwise.
Specifically, Judge Ada E. Brown’s memorandum opinion includes a stark rebuke of the underlying premises for the Final Rule, stating that the Final Rule itself “is based on inconsistent and flawed empirical evidence, fails to consider the positive benefits of non-compete agreements, and disregards the substantial body of evidence supporting these agreements.” The opinion also fires a shot across the FTC’s bow by reminding the agency that it “explicitly disclaimed substantive rulemaking authority” for 48 years, and even when the agency suggested it had such authority, it did not promulgate a single substantive rule under the specific subsection of the FTC Act on which it relied upon for the authority to issue the Final Rule. And, although Judge Brown’s finding of lack of statutory authority was sufficient to award summary judgment to plaintiffs, she determined that the FTC’s issuance of the Final Rule was arbitrary and capricious—a standard that considers whether an agency has failed to consider an important aspect of a problem in undertaking agency action or offers an implausible justification for its action.
Accordingly, existing non-compete agreements remain in effect for the foreseeable future provided they comply with applicable state and local laws.[3] Likewise, employers across the country can safely move the written notices they planned to send to their employees from the outgoing mail pile to “file 13” since Judge Brown’s decision has a nationwide effect, is not party-restricted, and affects persons in all judicial districts equally. But, because an FTC spokesperson has suggested the agency will appeal the decision and plans to continue to examine non-compete agreements on an as-applied basis, employers are still encouraged to review their template agreements with employment counsel.
Should you or another member of your business have any questions about the Final Rule’s impact on current and future non-compete agreements or need assistance analyzing agreements that protect your business interests, please contact a Wyatt lawyer. In addition, be sure to revisit the Wyatt Labor and Employment blog page for further developments and updates related to the FTC’s rulemaking, as well as other employment topics.
[1] See ATS Tree Servs., LLC v. Fed. Trade Comm’n, No. 2:24-cv-01743-KBH, 2024 WL 3511630 (E.D. Pa. July 23, 2024).
[2] See Properties of the Villages, Inc. v. Federal Trade Commission, No. 5:24-cv-0316-TJC-PRL (M.D. Fl. Aug. 15, 2024).
[3] Indeed, it appears increasingly likely that the Final Rule will never become effective considering the United State Supreme Court’s recent decision to overrule a long-standing precedent granting federal agencies significant deference in interpreting laws through agency rules and regulations. The Supreme Court’s decision provides an alternative basis to vacate the Final Rule should the Court ever be asked to weigh in.
Court’s decision provides an alternative basis to vacate the Final Rule should the Court ever be asked to weigh in.
