08/27/2024

Legally Speaking with Bob Dunlevey

Legally Speaking

by Marc Fleischauer and Bob Dunlevey
Taft/Law

FTC's Non-Compete Rule Halted!

On August 20, 2024, a Texas federal court imposed a nationwide injunction barring the implementation of a Federal Trade Commission (FTC) regulation that would have invalidated existing non-compete agreements. Ryan LLC v. Federal Trade Commission resolves uncertainty among employers since the FTC finalized its non-compete regulation (“Final Rule”) in April 2024.  The FTC’s Final Rule was scheduled to become effective on September 4, 2024.  Although the FTC may immediately appeal the Texas federal court’s injunction, the Final Rule will not take effect throughout the United States as scheduled. Currently, various courts are divided over this issue. Anticipate these court battles to move to appeal. In the meantime, employers do not need to distribute FTC required notices advising employees that their agreements are unenforceable.

The Final Rule was designed to bar enforcement of existing non-compete agreements in nearly all situations.  It was also intended to prohibit employers from creating most new non-compete agreements.  According to the FTC, such agreements are inherently anti-competitive.  However, many employers see non-compete agreements – i.e., restrictive covenants entered into voluntarily with new or existing employees to prevent unfair competition – as vital business tools needed to protect their business interests.  The FTC was accused of overreaching and exceeding its administrative authority without congressional approval. Other agencies are now facing similar scrutiny.

Various legal challenges have been attempted since the Final Rule was issued, but Ryan LLC is the first case to issue a nationwide injunction against the FTC’s implementation of the non-compete rule.  The court held that the FTC exceeded its statutory authority by promulgating the Final Rule, which the court determined to be “arbitrary and capricious.”  According to the court, the Final Rule was “unreasonably overbroad without a reasonable explanation,” and would have imposed a “one-size-fits-all approach with no end date.”  The court identified these flaws as the hallmark of “an unlawful agency action” and concluded that the proper remedy under the Administrative Procedures Act (APA) was to set aside the FTC’s Final Rule in its entirety. The FTC has indicated it will appeal the decision to the Fifth Circuit Court of Appeals. The Biden Administration provided the impetus to the FTC for outlawing non-compete agreements.

Although the Final Rule is enjoined, employers should nonetheless be prepared for their non-compete agreements to meet with extra scrutiny from courts in the future.  Given the heightened publicity and recent confusion surrounding such contracts, companies wanting to prevent unfair employee competition should consult with experienced employment counsel. These agreements must be carefully crafted and tailored to an employer’s particular circumstances.

If you have questions about the FTC’s Final Rule or effect of the court’s nationwide injunction, please contact Bob Dunlevey (rdunlevey@taftlaw.com) or Marc Fleischauer (mfleischauer@taftlaw.com) for more information.