Employer Alert: Federal Court Sets Aside FTC Final Rule Regarding Non-Compete Agreements

August 22, 2024

On Tuesday, the United States District Court for the Northern District of Texas set aside the Federal Trade Commission’s (“FTC”) final rule (the “Rule”) which would have banned employers from entering into non-compete agreements with all workers. As reported in a prior alert (on August 14, 2024), the Rule was to go into effect on September 4, 2024. The ruling applies to employers nationwide.

Ryan LLC v. FTC (Case No. 24-cv-986, N.D. Tex.)

On August 20, 2024, the Court granted Ryan LLC’s motion concluding that the FTC’s promulgation of the Rule was unlawful agency action; that the FTC lacks statutory authority to promulgate the Rule; and that the Rule is arbitrary and capricious. See Mem. Op. & Order at 22-27. The Court ruled that the FTC lacks rulemaking authority with respect to unfair methods of competition, and that in promulgating the Rule, it exceeded its authority. Further, the Court held that the Rule is “unreasonably overbroad without a reasonable explanation,” “imposes a one-size-fits-all approach with no end date,” and is based on “inconsistent and flawed empirical evidence” while failing to consider the benefits of non-compete agreements and the evidence supporting them. (Internal citations omitted.)

Impact of August 20 Order

As a result of the Court’s decision, the FTC cannot enforce the Rule against any employer. This decision will likely be the subject of an appeal to the U.S. Court of Appeals for the Fifth Circuit. Alternatively, the FTC may seek a stay of the Ryan court’s decision and order, pending the outcome of an appeal. Litigation in federal courts in Florida and Pennsylvania is ongoing.

What Does This Ruling Mean for Employers?

Employers are relieved from any obligation to comply with the Rule unless an appeal by the FTC succeeds. Employers must, however, continue to comply with applicable state laws concerning non-compete agreements.

Employers should continue to monitor any ongoing challenges to the Rule.

For further information about the FTC Non-Compete Rule, contact Allyson E. Kurker and Margaret H. Paget at Kurker Paget LLC.