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Federal Court Strikes Down FTC's Final Rule Banning Employee Non-Competition Provisions

In a welcome development for employers that rely on employee non-competition agreements, a federal judge in the Northern District of Texas recently rejected the Federal Trade Commission’s (“FTC”) efforts to impose a nationwide ban on non-competition provisions in employment agreements.

The court’s judgment in Ryan LLC v. Federal Trade Commission was issued shortly before the FTC's proposed final rule prohibiting almost all employee non-competition agreements (the “Final Rule”) was set to go into effect on September 4, 2024. This means that, at least until further notice, the Final Rule will be set aside and will not go into effect as planned.

Background

Non-competition agreements (often referred to as “non-competes”) restrict employees from working for business competitors for a defined period after their employment terminates.

Traditionally, the validity of non-competes has been a matter of state law. An increasing number of states (including Massachusetts) have enacted statutes defining the circumstances under which non-competes may be enforced, while most other states have left it to the courts to develop, on a case-by-case basis, the legal principles governing their enforceability. A few states (such as California) prohibit non-competes in virtually all cases.

In January 2023, the FTC published a notice of a proposed rule to enact a broad, nationwide ban on non-competes, indicating the agency’s intention to change radically the manner in which the enforceability of non-competes is evaluated. This past spring, by a 3-2 vote along political party lines, the five-person FTC issued its Final Rule, prohibiting employers from entering into new non-competes and rendering most existing non-competes unenforceable.

Ryan Court’s Decision

Employer groups have raised challenges in a number of courts to the FTC’s effort to ban non-competes. In the Ryan suit, brought by several employers and the U.S. Chamber of Commerce, the court ruled against the FTC and granted the plaintiffs’ motion to block the Final Rule. The court found that the Final Rule was an “arbitrary and capricious” action and that the FTC had exceeded its authority under the Administrative Procedures Act, which governs federal agencies’ authority to enact rules and regulations.

What Does This Mean For Employers?

While the Ryan decision squarely rejected the FTC’s proposed ban on non-competes, court challenges in other parts of the country leave uncertainty around whether employers will need to comply with the Final Rule at some point.

For instance, in Properties of Villages, Inc. v. Federal Trade Commission, in the Middle District of Florida, a federal judge sided with the Texas court in rejecting the Final Rule but limited the order to that particular plaintiff. In contrast, in ATS Tree Services, LLC v. Federal Trade Commission, in the Eastern District of Pennsylvania, the court provided the FTC with a victory by refusing the plaintiff employer’s request for a preliminary injunction enjoining the Final Rule.

While the Florida and Pennsylvania cases are important to watch, the Ryan decision is, thus far, the only final judgment by a court addressing the validity of the Final Rule. It seems likely that the FTC will appeal the decision to the U.S. Court of Appeals for the Fifth Circuit, which it has until late October to do.

So, while there is no immediate need for employers to change their non-compete practices, employers should monitor these developments closely. A court ruling contrary to the Ryan decision – whether by the Fifth Circuit or by one of the courts in the other pending cases – could alter the landscape yet again for employers.

In the meantime, employers should also remain cognizant of existing state laws that limit the enforceability of non-competes. Employee non-competition agreements should be thoughtfully drafted and reviewed with the guidance of legal counsel.

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SHPC will continue to monitor developments concerning the FTC’s Final Rule and provide updates as they occur. In the meantime, please feel free to contact one of our experienced employment attorneys with any questions.