On August 20, 2024, the United States District Court for the Northern District of Texas set aside the ban by the Federal Trade Commission (FTC) on non-competition agreements.

This decision, Ryan, LLC v. Federal Trade Commission, is likely to have wide-ranging implications for employers and employees alike. The Non-Compete Rule was scheduled to take effect on September 4, 2024. As discussed below, the District Court held that the FTC Non­-Compete rule is unlawful and “shall not be enforced or otherwise take effect on its effective date of September 4, 2024 or thereafter.”

Overview

In January 2023, the FTC proposed the Non-Compete Rule which would prohibit, with narrow exceptions, employers from entering into non-compete clauses with workers starting on the rule’s compliance date (September 4, 2024) and require employers to rescind existing non­compete clauses by September  4, 2024. The FTC estimates that approximately one in five American workers — nearly 30 million workers — are subject to a non-compete.

Nearly 16 months later following an extensive review process, the FTC, in April 2024, adopted the final Non-Compete Rule enacting the ban. The final Non-Compete Rule provides, in pertinent part, as follows:

What is a non-compete clause?

A non-compete clause is a term or condition of employment that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from:

1. Seeking or accepting work in the United States with a different person where such work would begin after the conclusion of the employment that includes the term or condition; or
2. Operating a business in the United States after the conclusion of the employment that includes the term or condition.

The final Non-Compete Rule outlines unfair methods of competition which include entering into or attempting to enter into a non-compete clause; enforcing or attempting to enforce a non-compete clause; or representing that an employee is subject to a non-compete clause, subject to narrow exceptions.

On July 3, 2024, the District Court issued an injunction staying (that is, suspending) the effective date of the Non-Compete Rule, but only as to the plaintiffs named in that case. The court left for further consideration, and another day, whether it would extend the injunction on a nationwide basis.

The District Court’s Decision

In its latest decision, the District Court set aside the FTC Non-Compete Rule for two essential reasons.

First, it concluded that the FTC exceeded its statutory authority in establishing the rule. Second, it held that the FTC acted in an arbitrary and capricious manner. Specifically, as to the first basis for its decision, the District Court concluded that although the FTC had authority to issue interpretive rules, general statements of policy, and to make rules dealing with unfair or deceptive practices, it did not have the statutory authority to issue substantive rules regarding unfair methods of competition – such as the broadly crafted Non-Compete Rule.

In holding that the FTC also acted in an arbitrary and capricious manner, the District Court noted that the FTC imposed a “one-size-fits-all approach” with no end to addressing non­competition provisions; that no state had enacted a non-compete rule as broad as the FTC’s Non­-Compete Rule; and that the FTC failed to sufficiently consider (narrower) alternatives to such a sweeping rule.

Next Steps

The FTC expressed disappointment in the District Court’s decision and indicated that it is entertaining the possibility of an appeal. It also cautioned that the decision did not prevent the FTC from addressing non-competition agreements through case-by-case enforcement actions.

It is important to understand what the District Court’s ruling does not do. It does not affect existing state laws that restrict the use of non-competition agreements, nor does it prevent state and federal courts from considering the enforceability of such agreements on a case-by-case basis. Simply put, the challenges in considering, crafting, and enforcing non­compete clauses, non-solicitation clauses and, to a lesser extent, confidentiality provisions remain. Accordingly, employers, together with their counsel, should consider the following:

1. Reviewing existing non-competition agreements, non-solicitation, and confidentiality agreements.

2. Determining whether post-employment restrictions are necessary or appropriate to protect an organization’s reasonable business interests and if so, the nature and scope of such restrictions that are warranted (and for which categories of employees).

3. Evaluating whether and under what circumstances they will consider enforcing such agreements.

4. Assessing possible alternatives to restrictive agreements, including proactive measures to protect confidential, sensitive, and proprietary information, as well as trade secrets.

5. Establishing new and sound strategies for retaining employees so that post-employment restrictions are not implicated in the first instance.

Time will tell what the FTC does next in response to the District Court’s sweeping decision. In the meantime, employers would do well to consider the measures addressed above — particularly in light of the current climate where restrictive agreements have come under increasing scrutiny.

For more information about human resource audits or the employment practice, please contact Marc at (301) 657-0184 or by email at mrengel@lerchearly.com.