Court Stops FTC Noncompete Rule: What Should Employers Do Now?
In April 2024, the Federal Trade Commission (FTC) issued a nationwide rule banning noncompete agreements starting on September 4. See our firm’s Legal Update. Almost immediately, several lawsuits were filed challenging the FTC’s authority to regulate noncompetes. And on August 20, a federal judge in Texas issued a sweeping decision that prevents the FTC’s Noncompete Rule from taking effect.
While the ruling is a reprieve for employers, it may not be a panacea. Another federal court in Pennsylvania reached a contrary decision, ruling instead that the FTC had adequate statutory authority to ban noncompetes. Appeals are expected, so this is not the end of the story. More importantly, from a practical standpoint, employers are already regulated under numerous state laws that make it increasingly difficult for employers to impose restrictive covenants, including noncompetes, customer and employee nonsolicitation agreements, and nondisclosure agreements.
The Federal Court’s Ruling
The Texas federal district court issued its final decision on the merits ruling against the FTC in Ryan LLC, et al., v. Federal Trade Commission. The court ruled that the FTC’s Noncompete Rule shall not be enforced or otherwise take effect nationwide. According to the court, "the text and the structure of the FTC Act reveal the FTC lacks substantive rulemaking authority with respect to unfair methods of competition.” The court reasoned that the FTC’s adoption of a one-size-fits-all approach, combined with the FTC’s rejection of more narrowly tailored options that could curb abusive noncompete agreements, meant that the Noncompete Rule was both arbitrary and capricious.
The FTC had argued that relief should be limited to the named plaintiffs rather than nationwide. The court disagreed, stating that the Administrative Procedure Act does not contemplate party-specific relief. According to the court, "setting aside agency action under [the Administrative Procedure Act] has a nationwide effect, is not party-restricted, and affects persons in all judicial districts equally.” The court concluded, "the Rule shall not be enforced or otherwise take effect on its effective date of September 4, 2024, or thereafter.”
What Should Employers Do Now?
The Ryan court’s order could theoretically be stayed pending appeal. This would leave the Noncompete Rule in effect until the appeal is resolved, but that outcome currently seems unlikely. Meanwhile, other challenges to the Noncompete Rule continue to work their way through federal courts in Florida and Pennsylvania.
The Ryan decision provides businesses with some relief because they no longer need to comply with the Noncompete Rule’s requirements on September 4, 2024. Those onerous requirements included notifying employees that their noncompetes were no longer enforceable and determining whether nonsolicitation and nondisclosure agreements were functional noncompetes within the FTC’s noncompete ban. Yet uncertainty about the future of noncompete agreements still exists. Federal lawmakers continue to introduce legislation banning noncompetes and authorizing broader authority to the FTC. While federal legislation faces an uphill hurdle in the current Congress, state legislatures have continued at a rapid pace to expand the patchwork approach to noncompetes and other restrictive covenants. These laws make it challenging for employers operating across multiple states, particularly when dealing with a remote or hybrid workforce. This takes a toll on employers who seek to comply with various state laws while avoiding government enforcement actions and civil lawsuits. Even employers who do not impose restrictive covenants on their employees must seek legal counsel when hiring employees bound by noncompetes, or they risk getting sued for tortiously interfering with those contracts.
For these reasons, employers should continue to monitor pending lawsuits challenging the FTC’s Noncompete Rule, and remain informed about state law developments across the states in which they operate and their remote employees may work. For example, Washington’s Legislature has recently amended its 2019 noncompete statute to cover certain nonsolicitation agreements. See our firm’s Legal Update.
Lane Powell’s team of labor and employment attorneys is here to help your organization comply with state and local laws, and develop and implement the strategy that supports your business and your employees. For more information, contact Katheryn Bradley or Sean Jackson, or visit our firm’s Labor, Employment & Benefits page. You can also keep up to date by subscribing to Lane Powell’s Legal Updates or registering for our fall Labor & Employment Seminar.