The ability of employers to legally enforce noncompetition restrictions received a big win last week when a federal court in Texas set aside the Federal Trade Commission’s (FTC) Final Rule seeking to ban noncompete clauses between employers and their workers. So it appears the FTC’s rule prohibiting noncompetes is dead, at least for now.
In a previous article, we outlined the FTC’s Final Rule and the swift legal challenges attempting to block its implementation. In particular, we looked at a July 3, 2024 decision in Ryan LLC v. FTC, where a Texas federal court granted a motion for a preliminary injunction against the FTC’s Final Rule, and temporarily enjoined the noncompete ban from going into effect against the named plaintiff/intervenors. Although, in its initial preliminary injunction ruling, the court only blocked the September 4, 2024 implementation of the Final Rule against the plaintiff, Ryan, LLC, our article posited that the court in Ryan could issue a broader nationwide block of the FTC rule in the future.
That predication came true this past week. On August 20, 2024, the Ryan Court granted the plaintiff’s motion for summary judgment and held that the FTC’s Final Rule should not be enforced or otherwise take effect on September 4, 2024 or thereafter. With the scales of justice seemingly tipping back and forth over the legality of noncompetition clauses, we will analyze what the Ryan court said and the impact on employers moving forward.
Ryan LLC v. FTC
Following the Ryan court’s grant of a preliminary injunction, both parties submitted motions for summary judgment regarding the propriety of the FTC’s Final Rule. In the cross-summary judgment motions, the main issues in front of the court were:
(i) whether the FTC was permitted to create substantive rules regarding unfair methods of competition, and
(ii) whether the Final Rule’s sweeping prohibition was arbitrary and capricious.
With the first issue, the court focused on the statutory text of Sections 6(g) and 18 of the FTC Act, which grant the FTC some rulemaking power with respect to unfair methods of competition. In analyzing the text, the court recognized that the relevant statutory provisions lacked any language regarding the legal consequences or “penalties” for failure to confirm to the FTC’s regulations. As such, the court held that the FTC’s authority under Sections 6(g) and 18 is merely confined to “interpretive or procedural rules” and not substantive rulemaking powers (i.e., not a nationwide ban of noncompetition agreements).
The court next looked at whether the FTC’s Final Rule is arbitrary and capricious. In rejecting the Final Rule, the court highlighted the FTC’s “lack of evidence as to why they chose to impose such a sweeping prohibition—that prohibits entering or enforcing virtually all non-competes—instead of targeting specific, harmful non-competes[.]” The court noted that the FTC failed to show why such a “categorical ban” was necessary based on the evidence of how different states approached non-compete enforcement in different factual situations. The court also emphasized that the FTC outright ignored some of the benefits of noncompetition restrictions. In total, the court held that the FTC exceeded its statutory power in promulgating its Final Rule on noncompetition agreements. The court ruled that the Final Rule should not be enforced or otherwise take effect against all employers in the United States.
What Now For Employers?
The big headline from the Ryan decision is that employers no longer need to scramble by September 4, 2024 to ensure compliance with the FTC’s noncompete ban. While litigation over the FTC’s Final Rule may not be over, as challenges may continue in other jurisdictions, employers can rely on the decision in Ryan to argue that their noncompetition restrictions are not per se unenforceable.
Additionally, the legal avenues to challenge the FTC’s rule that was upheld in Texas is similar to several Supreme Court and federal court decisions undoing the Chevron Doctrine. To learn more about the growing skepticism federal courts put on administrative rulemaking and adjudicative power please see the links to our other articles below.
- How Recent Changes to Administrative Law May Alter Labor and Employment Law as We Know It: NLRB
- How Recent Changes to Administrative Law May Alter Labor and Employment Law as We Know It
- So Long, Chevron: What The Elimination Of Agency Deference Means For Employers And The Future Of Labor And Employment Law
- Not Dead Yet: Noncompetes Survive, the FTC Rule Doesn’t (For Now)
Lastly, even with this win for employers, there are still several state law and state court restrictions on noncompetition restrictions that employers must be aware of. Several states have set wage limits on when an employer can restrict an employee’s ability to compete (i.e., Colorado, Illinois, Washington, Washington D.C.), and other states have outright banned non-compete restrictions in employment agreements (i.e., California, Minnesota, North Dakota and Oklahoma).
If you have any questions on best practices to draft restrictive covenant agreements or defend the enforceability of your restrictive covenant agreements, please contact a member of the Kelley Drye Labor and Employment team.
