Introduction

In August of this year, a Texas federal court blocked the Federal Trade Commission’s Noncompete Rule (16 C.F.R. Section 910.1-6) (Final Rule) on a nationwide basis for all employers. The Final Rule would have banned nearly all noncompetes for most types of workers and was set to go into effect on Sept. 4, 2024. Despite this favorable ruling, the future of the Final Rule is uncertain because of ongoing litigation in other jurisdictions. The Circuit Courts of Appeal and the U.S. Supreme Court may ultimately be asked to weigh in, and the outcome of the upcoming election in November may also have an impact on the Final Rule’s fate.

The FTC Rule

On April 23, 2024, the Federal Trade Commission (FTC) approved the Final Rule banning most noncompete agreements as an unfair method of competition in violation of Section 5 of the FTC Act. The Final Rule’s definition of noncompete is broad and includes any term or condition that in any way impacts the ability of a worker to seek or accept employment with another business or to operate their own business after the working relationship ends. It also extends beyond traditional employees to include independent contractors, volunteers, and externs or interns. The Final Rule would exclude pre-existing noncompetes with “senior executives,” defined as employees who are in “policy-making” positions and earn more than $151,164 per year. All other pre-existing noncompetes would have become void as of the effective date of the Final Rule on Sept. 4, 2024, and even future noncompetes with “senior executives” would have been prohibited following the effective date of the Final Rule. Additionally, employers would have been required to provide current and past workers who previously entered into a noncompete written notice that they would not be enforcing the noncompetes.

Ryan LLC Files for an Injunction

Mere hours after the FTC issued the Final Rule, Ryan LLC, a Texas employer and tax preparation company (the Plaintiffs) filed a complaint against the FTC in the U.S. District Court for the Northern District of Texas. The U.S. Chamber of Commerce and a few other business groups subsequently intervened into the case. Plaintiffs based the complaint on the Administrative Procedures Act (APA), which grants courts with oversight over agency actions and empowers courts to determine those actions to be unlawful and set them aside. Plaintiffs then filed a motion to stay the effective date of the Final Rule and to preliminarily enjoin the FTC from enforcing the rule. Plaintiffs asserted that (1) the FTC had no statutory authority to create the Final Rule; (2) the Final Rule is the result of an unconstitutional exercise of power; and (3) the FTC’s acts, findings, and conclusions in enacting the Final Rule were arbitrary and capricious. 

On July 3, 2024, Judge Ada E. Brown granted Plaintiffs’ motion for preliminary injunction. The court’s analysis focused on Section 5 of the FTC Act, which empowers the FTC to prevent unfair competition or unfair or deceptive acts affecting commerce, and Section 6(g) of the FTC Act, which provides the FTC with the ability “to make rules and regulations for the purposes of carrying out the provisions” of the statute. The court determined that there was a substantial likelihood that the Plaintiffs will prevail on the merits because the FTC Act did not give the FTC the authority to create substantive rules to prevent unfair methods of competition. The court further held that there was a substantial likelihood that the FTC’s Final Rule is arbitrary and capricious because it is “unreasonably overbroad” and “imposes a one-size-fits-all approach with no end date.” Interestingly, however, Brown decided to limit the reach of her preliminary injunction to only the named Plaintiffs in the lawsuit.

The Court Sets Aside the Final Rule

Following the July 3, 2024 ruling, the parties both moved for summary judgment. On Aug. 20, 2024, the court granted summary judgment in favor of the Plaintiffs challenging the Final Rule and against the FTC, explaining that not only did the FTC lack statutory authority to create the rule, but finding that the Final Rule itself is arbitrary and capricious and in violation of the APA. As for statutory authority, the court concluded that Section 6(g) of the FTC Act did not grant the FTC with the authority to create substantive rules regarding unfair methods of competition. The court also determined that the Final Rule was overbroad, and the FTC did not have a good explanation for why it could not just target certain types of noncompetes that it viewed as harmful. Moreover, in a rebuke of the underlying premise for the Final Rule, the court found that the Final Rule “is based on inconsistent and flawed empirical evidence, fails to consider the positive benefits of noncompete agreements, and disregards the substantial body of evidence supporting these agreements.”

Practical Implications of the ‘Ryan’ Decision and Current Landscape

Unlike the court’s preliminary injunction decision (which was limited to the Plaintiffs), the court’s summary judgment ruling set 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.” As a result, the Final Rule did not take effect on Sept. 4, 2024, and it will not take effect absent some change or challenge otherwise. While this decision is the first word related to the Final Rule’s viability, it probably will not be the last—indeed, the fight over the future of the Final Rule is far from over as the FTC can directly appeal Brown’s decision to the Fifth Circuit. 

Additionally, litigation in district courts in the Eastern District of Pennsylvania and the Middle District of Florida regarding the Final Rule is ongoing. In ATS Tree Services v. FTC in Pennsylvania, the court denied plaintiff’s motion for a preliminary injunction on July 23, 2024, and the motion for summary judgment briefing will be completed in late Oct. 2024. The court’s decision on the summary judgment motion could then be appealed to the Third Circuit. Moreover, in Properties of the Villages v. FTC in Florida, the court granted plaintiff’s motion for a preliminary injunction on Aug. 15, 2024. The summary judgment briefing is completed, and the court’s forthcoming decision could then be appealed to the Eleventh Circuit. Depending on if and how the Third, Fifth, and Eleventh Circuits rule, the fate of the Final Rule could ultimately be determined by the U.S. Supreme Court. Furthermore, the outcome of the upcoming November presidential election and even the ultimate makeup of Congress could impact the federal government’s approach in continuing to fight in favor of, or even abandon, the Final Rule.

Given the uncertainty regarding what the future may hold for the Final Rule, all employers should be working closely with their restrictive covenants counsel now to most effectively protect their legitimate business interests given this reprieve, focusing not only on noncompete application, but strengthening their respective confidentiality, non-solicitation, invention/assignment and other related contractual provisions and agreements. It is also important to note that, regardless of whether the FTC’s Final Rule ever becomes effective, that will not impact the growing number of state laws that regulate noncompetes and other types of restrictive covenants, meaning that the overall issue of restrictive covenant strategy and compliance remains alive for nearly all employers, even while the Final Rule is currently set aside.

Reprinted with permission from the September 23, 2024 issue of The Recorder. © 2024 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.