Quick Hits

• On July 3, 2024, the U.S. District Court for the Northern District of Texas had granted a limited preliminary injunction staying enforcement of the FTC’s final rule prohibiting non-compete clauses, but only as to the parties in the case, pending a final ruling on the merits.
• On August 20, 2024, the court issued a significantly broader ruling, finding that in issuing the non-compete rule, the FTC had exceeded its rulemaking authority with respect to unfair methods of competition.
• The court further held that the non-compete rule was arbitrary and capricious because it was unreasonably overbroad and based on inconsistent and flawed empirical evidence.
• The court entered a final judgment that is immediately appealable to the Fifth Circuit Court of Appeals.

The FTC voted 3–2 to adopt the final rule on April 23, 2024, and published it on May 7, 2024. With limited exceptions, the rule would have effectively banned all non-compete agreements—and provisions that functioned as non-competes—between businesses and “workers” as “unfair method[s] of competition.” It also would have required companies to refrain from enforcing most existing non-compete agreements and notify “workers” that any non-compete obligations were now unenforceable. The rule had been scheduled to take effect on September 4, 2024.

On April 23, 2024, Ryan LLC, a global tax consulting firm headquartered in Dallas, Texas, filed a lawsuit against the FTC in the U.S. District Court for the Northern District of Texas seeking to vacate and set aside the rule. The U.S. Chamber of Commerce filed a similar lawsuit a day later in the U.S. District Court for the Eastern District of Texas, but after that court stayed the Chamber’s claims, it intervened in Ryan LLC’s lawsuit. That lawsuit, Ryan LLC v. Federal Trade Commission, was one of a handful of lawsuits challenging the rule.

Ryan, ultimately joined by the Chamber, filed a motion to stay the effective date of the rule, seeking a preliminary injunction postponing the rule’s effective date pending a ruling on the merits. On July 3, 2024, the court granted the request for preliminary injunctive relief and stayed the effective date of the FTC’s rule, pending a final decision on the merits. 

On August 20, 2024, the court permanently set aside the FTC’s rule:

Having concluded that (i) the FTC promulgated the Non-Compete Rule in excess of its statutory authority, and (ii) the Rule is arbitrary and capricious, the Court must “hold unlawful” and “set aside” the FTC’s Rule as required under [Section] 706(2)…. As the [Fifth Circuit] put in a couple of recent cases, setting aside an agency action under [Section] 706 has a “nationwide effect,” is not “party restricted,” and “affects persons in all judicial districts equally.” [citations omitted] Thus, the Court hereby holds unlawful and sets aside the Rule.

Key Takeaways

Businesses that were planning to comply with the non-compete rule by rewriting template agreements and preparing a notice to current and former employees regarding the rule’s effects can now stand down those efforts. The non-compete rule will no longer take effect on September 4, 2024. 

The FTC will likely appeal the U.S. district court’s ruling to the Fifth Circuit, where the non-compete rule is expected to face a hostile reception. It now appears doubtful that the non-compete rule will ever become effective in its current form, but it will probably be years before the issue is finally resolved. While the rule is likely in the rear-view mirror, its impact on state courts and state legislatures will continue. Given the increasing attention to non-compete agreements at the state and federal level, companies should maintain efforts to update and implement their restrictive covenant programs so that each covenant is narrowly tailored to protect their actual business needs.