By: Ross E. Simpson
As we previously discussed, on April 23, 2024, the Federal Trade Commission (FTC) issued a Final Rule that was scheduled to become effective on September 4, 2024, and would have, in most situations, prohibited employers from entering into or attempting to enter into new non-compete agreements with any worker. The Final Rule would also have required employers to notify all current and former workers subject to an existing non-compete agreement that it is no longer enforceable.
Yesterday, a federal district court in Texas struck down the Final Rule on a nationwide basis, meaning it will not go into effect on September 4, 2024 or afterwards, and cannot be enforced. See Ryan LLC v. Federal Trade Commission, 3:24-cv-986 (N.D. Tex., Aug. 20, 2024), ECF No. 211. The court first determined that the FTC lacked the statutory authority to issue the Final Rule because Congress only gave the FTC the power to issue procedural rules regarding unfair methods of competition, rather than substantive rules, which the court found the Final Rule to be. The court also determined that the Final Rule was “arbitrary and capricious” because it was overly broad without a reasonable explanation.
For these reasons, the court reasoned that federal law required the Final Rule to be deemed “unlawful’ and “set aside” with nationwide effect. This means that, consistent with state law, employers across the country can continue to enter into new non-compete agreements and can maintain existing non-compete agreements. The FTC has sixty days to appeal the decision, which would be heard by the employer-friendly 5th Circuit Court of Appeals. Any possible appeal from there would be heard by the United State Supreme Court, which in recent years has taken aim at the regulatory powers of federal agencies and would likely be unreceptive to the FTC’s arguments in favor of its ability to issue the Final Rule.
The bottom line is that, pending further legal development, non-compete agreements remain a viable way for employers to protect confidential information and key relationships, subject to state law. You should take this opportunity to work with competent employment counsel to ensure that your existing and future non-compete agreements comply with the applicable law of the state where the affected worker is located. You may also want to compile all existing non-compete agreements binding current and former workers, both for compliance purposes and for use in the unlikely event that a potential appeal results in the Final Rule being allowed to take effect in the future.
If you have questions or concerns regarding the use of non-compete agreements in your business or have any other compliance or employment concerns, please do not hesitate to contact us.