News & Insights

By Phil Jelsma & Ulrick Matsunaga

Following months of uncertainty, last week a Texas Federal Judge struck down the Federal Trade Commission’s (FTC) rule banning non-compete agreements nationwide.

In the much-anticipated ruling, Judge Ada Brown, a district judge for the Northern District of Texas, found that the agency exceeded its authority with the ban, which would have rescinded contracts that prevent workers from moving to competing companies. Now, existing non-compete agreements and clauses are still enforceable, and employers do not need to notify employees that their non-competes are no longer valid.

Context behind the non-compete rule

On April 23, 2024, after concluding that non-compete agreements are an unfair method of competition, the FTC issued a final rule banning most non-compete clauses nationwide. The rule, which was scheduled to go into effect on Sept. 4, 2024, would have impacted an estimated 30 million workers and consisted of (i) a ban on most new non-compete clauses with workers including senior executives; (ii) existing non-competes would be invalidated; (iii) a narrow exception would remain permitting some non-competes for new and existing agreements with senior executives; and (iv) employers would need to notify workers that their non-compete clauses would no longer be enforced. The rule was developed under the theory that non-competes suppressed wages and limited employee mobility, stifled innovation and business formation and caused increased market concentration and higher consumer prices.

The FTC estimated that the rule would increase new business formation by 2.7% per year, raise average worker earnings by $524 annually, as well as reduce healthcare costs by up to $194 billion over a decade.

Rule met with multiple challenges

Since its publication, the rule has been subject to various legal challenges, with mixed results. On July 3, 2024, Judge Brown issued the first challenge, Ryan LLC, v. Federal Trade Commission, No. 3:24-cv-00986-E, 2024 WL 3297524 (N.D. Tex. Jul. 3, 2024), in which she issued a preliminary injunction postponing the implementation of the final rule, but only as to the parties before the court. This limitation left open the possibility of the rule going into effect as planned and remaining applicable to all other persons nationwide.

Then on July 10, 2024, Judge Kelley Brisbon Hodge of the United States District Court for the Eastern District of Pennsylvania split from Judge Brown’s July 3 ruling. In ATS Tree Services, LLC v. Federal Trade Commission, No. 2:24-cv-01743 (E.D. Pa. Jul. 10, 2024), she concluded that a preliminary injunction would be improper because the plaintiffs in the Pennsylvania case had not demonstrated that they would suffer any irreparable harm as a result of the rule. Judge Hodge also found that the final non-compete rule was within the FTC’s authority and that it was consistent with the agency’s congressional mandate to prevent unfair competition practices.

On Aug. 14, 2024, in Properties of the Villages, Inc. v. Federal Trade Commission, No. 5:24-cv-316-TJC-PRL, 2024 WL 3870380 (Aug.15, 2024) Judge Timothy Corrigan of the United States District Court for the Middle District of Florida issued a preliminary injunction but only as to the parties before the court.

This assortment of decisions left employers in a difficult position of uncertainty. With the Sept. 4, 2024 effective date rapidly approaching, employers needed to decide. Should they notify their employees of the purported invalidity of their restrictive covenants even though a final judgment had not been entered or risk agency action for the failure to timely notify employees of the effectiveness of the rule?

Invalidation of the rule

The answer arrived on Aug. 20, 2024, when Judge Brown set aside the rule nationwide. In Ryan LLC, v. Federal Trade Commission, No. 3:24-cv-00986-E, 2024 WL 3879954 (N.D. Tex. Aug. 20, 2024) Judge Brown concluded that the FTC exceeded its statutory authority in adopting the final non-compete rule, which she deemed both arbitrary and capricious. While the FTC has some authority to issue rules to mitigate unfair competition, Judge Brown held that this authority does not extend to issuing substantive rules regarding unfair methods of competition. The absence of a statutory penalty for violations of such rules further supports the conclusion that the FTC lacks the power to enforce them with substantive force.

Additionally, Judge Brown found the non-compete rule to be arbitrary and capricious because it was unreasonably overbroad, applying a one-size-fits-all approach without sufficient explanation or an end date. According to Judge Brown, the rule failed to demonstrate reasonable proportionality between its scope and the varying facts and circumstances it sought to regulate.

What happens next?

This latest ruling is far from a settled matter — and it remains to be seen whether the FTC will appeal the Texas decision.

However, on Sept. 4 all non-competes will still be enforceable. While the immediate impact of the pending deadline has eased, companies using non-competes should still consider evaluating the legal risks of enforcing them as the issue works its way through the appellate system.

Phil Jelsma is a partner and chair of the Tax Practice Group, and Ulrick Matsunaga is an associate and works in the Entity Formation and Tax Practice Group at Crosbie Gliner Schiffman Southard & Swanson (CGS3). The full article was publised in The Daily Journal and The Daily Transcript (subscriptions required).