Hunton Employment & Labor Perspectives

On April 23, 2024, the Federal Trade Commission (“FTC”) approved a final rule banning most non-compete agreements between employers and their workers (the “Final Rule”). However, in the afternoon of Tuesday, August 20, 2024, Judge Ada E. Brown of the United States District Court for the Northern District of Texas, followed her July preliminary injunction against the rule with a substantive ruling granting summary judgment in favor of the plaintiffs challenging the Final Rule and against the FTC (“Memorandum Opinion and Order”), explaining that “the Court concludes the text and the structure of the FTC Act reveal the FTC lacks substantive rulemaking authority with respect to unfair methods of competition, under Section 6(g). See generally 15 U.S.C. § 46(g); 15 U.S.C. § 57a. Thus, when considering the text, Section 6(g) specifically, the Court concludes the Commission has exceeded its statutory authority in promulgating the Non-Compete [Final] Rule.”  Memorandum Opinion and Order at 22. 

Moreover, in a rebuke of the underlying premise for the Final Rule, the Court further found 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.”  Id. at 24 (footnote omitted). 

In reaching its decision, the Court specifically held that the Final Rule was an unlawful agency action as follows:

In sum, the Court concludes that the FTC lacks statutory authority to promulgate the Non-Compete Rule, and that the Rule is arbitrary and capricious. Thus, the FTC’s promulgation of the Rule is an unlawful agency action. See 5 U.S.C. § 706(2).

Id. at 26. 

Most importantly as it relates to employers’ questions regarding next steps given the impending September 4, 2024 compliance deadline, the Court explained that it was setting aside the Final Rule on a nationwide basis, ordering that the Final Rule “shall not be enforced or otherwise take effect on its effective date” (id. at 27 (emphasis added)), meaning that the Final Rule will no longer take effect as presently scheduled absent some change or challenge otherwise:

“The text of the APA means what it says.” Loper Bright Enters., 144 S. Ct. at 2262. 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 § 706(2). As to the FTC’s argument that relief should be limited to the named Plaintiffs—the APA does not contemplate party-specific relief. See generally 5 U.S.C. § 706(2). “As [the Fifth Circuit] put it in a couple of recent cases, setting aside agency action under § 706 has ‘nationwide effect,’ is ‘not party-restricted,’ and ‘affects persons in all judicial districts equally.’” Braidwood Mgmt., Inc. v. Becerra, 104 F.4th 930, 951 (5th Cir. 2024) (internal citations omitted).  Thus, the Court hereby holds unlawful and sets aside the Rule. See 16 C.F.R. § 910.1–.6.14. The Rule shall not be enforced or otherwise take effect on its effective date of September 4, 2024, or thereafter. See 16 C.F.R. § 910.1–.6.

Id. at 26-27.

Hunton will continue to monitor and provide further analysis as these issues continue to develop.  That said, while this decision is very favorable for employers, the Final Rule will (likely) not go into effect as scheduled.  This decision is a strong analysis against the Final Rule’s foundation on a going forward basis, but the fight over the future of non-competes is far from over.  As a result, all employers should be working closely with their restrictive covenants counsel now to most effectively protect their legitimate business interests given this reprieve.