As we previously posted, on April 23, 2024, the Federal Trade Commission (FTC) issued a final rule (the “FTC Non-Compete Rule “) broadly banning non-competition agreements. At that time, we noted that lawsuits had already been filed challenging the FTC’s rule and that it was reasonably likely that the rule would be struck down. On July 3, 2024, the United States District Court for the Northern District of Texas, issued an order and opinion preliminarily enjoining the FTC’s non-compete ban.
What Does the FTC’s Non-Compete Ban Provide?
As we explained in our prior post, the FTC Non-Compete Rule prospectively bans new non-competition agreements for most workers and retroactively invalidates existing non-competition agreements. The only exception from this ban is for senior executives, which the rule defines as workers in policy making positions earning at least $151,164 per year.
The FTC Non-Compete Rule also requires that employers inform all employees with existing non-competes that the non-competition provisions are no longer valid, when (if) the rule becomes effective.
The FTC’s non-compete ban is scheduled to become effective on September 4, 2024, subject to the pending litigation.
What was the Challenge to the FTC Non-Compete Rule?
Ryan, LLC (“Ryan”) was one of the first parties to file a lawsuit challenging the FTC’s non-compete ban. The Chamber of Commerce of the United States of America, the Business Roundtable, the Texas Association of Business, and the Longview Chamber of Commerce intervened in the Ryan lawsuit.
The Complaint alleged that the FTC’s actions in implementing a rule banning non-competition agreements was unlawful because does not have the constitutional authority to create such a rule, and the FTC’s findings in support of the rule were arbitrary and capricious.
What Did the Court Find?
The District Court issued at 33 page opinion that went through in detail the standard for preliminary injunctions and the challenge to the FTC Non-Compete Rule. The Court ultimately found that the plaintiffs were entitled to an injunction because, among other reasons, plaintiffs were likely to prevail on their claim that the FTC lacked the authority to implement the non-compete ban and the rule was arbitrary and capricious. While the District Court found that the FTC does have “some authority to promulgate rules to preclude unfair methods of competition” the FTC lacked authority to create “substantive rules.”
The District Court did, however, limit the scope of its preliminary injunction to the plaintiff and the intervenors. As a result, the FTC Non-Compete Rule is still scheduled to become effective for non-parties on September 4, 2024. The District Court plans to issue a final ruling by August 30, 2024, in advance of the FTC Non-Compete Rule’s effective date.
What Should Businesses Do Now?
Based upon the language in the District Court’s opinion, the most likely outcome of the lawsuit is that the FTC Non-Compete Rule will be stricken down by the court’s final order.
Employers that use non-competition agreements have two main options. First, they can await the District Court’s ruling as it should be issued prior to the effective date of the FTC Non-Compete Rule. Second, employers could join one of the business groups, such as the Chamber of Commerce of the United States or Business Roundtable, which intervened in the Ryan lawsuit and arguably obtain the protections of the preliminary injunction.
Also, regardless of the likelihood that the FTC Non-Compete Ban Rule will be stricken down, employers should review their existing non-competition agreements to ensure that they are narrowly tailored to protect a legitimate business interest. Even in the absence of the FTC Non-Compete Ban Rule, courts will refuse to enforce overbroad non-competition clauses.
If you have questions about your business’s non-competition, or other agreements, please schedule a complimentary consultation with us through our online scheduling system.
Information contained in this blog is provided for informational purposes and does not constitute legal advice or opinion. You should consult with an attorney about the specifics of your matter or legal issue.