Just two weeks before the Federal Trade Commission’s (FTC) Non-Compete Clause Rule was scheduled to take effect, a federal judge in Texas issued an expansive and impactful decision yesterday that finds the Rule to be unlawful and indefinitely prevents the FTC from enforcing it as planned.
As we posted in a previous article, the FTC’s Rule has faced multiple lawsuits since its publication in April 2024, each disputing the FTC’s authority to promulgate a nationwide ban on non-compete restrictions. The Rule was set to go into effect on September 4, 2024, if it was able to withstand those legal challenges.
One of those challenges was articulated in a case filed by accounting firm, Ryan LLC, against the FTC in the U.S. District Court for the Northern District of Texas on the same day that the FTC adopted the Rule. Ryan LLC v. FTC, No. 3:24-CV-00986-E (N.D. Tex.). Several business organizations joined that lawsuit on the side of Plaintiff Ryan LLC, including the U.S. Chamber of Commerce, the Texas Association of Business, and others. In its decision yesterday, the Court stated, in part, that the FTC, which primarily enforces federal antitrust laws, does not have the authority to ban practices it deems to constitute unfair methods of competition by adopting substantive rules. The Court’s decision also stated, among other things, that the Rule is unlawful and must be “set aside” entirely, which effectively invalidates the Rule nationwide.
Other lawsuits challenging the Rule were filed in federal district courts in Pennsylvania and Florida. In the Pennsylvania case, the court denied the plaintiff’s motion for a preliminary injunction, so it found in favor of the FTC. ATS Tree Servs. LLC v. FTC, No. 2:24-cv-01743 (E.D. Pa.). In the Florida case, the plaintiff was successful but only in stopping the Rule from going into effect as to its own individual business. Properties of the Villages, Inc. v. FTC, No. 24-cv-316 (M.D. Fla.).
Ryan LLC v. FTC was the first case filed of these three, and it was largely considered the one to watch. Many business organizations and lobbying groups voiced support for the plaintiffs in each of the cases against the FTC, including the National Retail Federation, National Federation of Independent Business Small Business Legal Center, Inc., Associated Builders and Contractors, Inc., American Hotel & Lodging Association, and several others. The Court’s ruling in Ryan LLC v. FTC was originally expected no later than August 30, 2024, and we anticipate that its early issuance will be a relief to any employers that were waiting for that decision to determine whether they would need to comply with the Rule.
What Does This All Mean?
For the time being, businesses and individuals who are parties to noncompete agreements may assume that they are still bound by those provisions, subject to applicable state law. In other words, if a state bans non-competes (e.g., Minnesota), that state’s law still controls, and the ban still applies as it normally would in that state.
This may not be the last we hear of the FTC’s Non-Compete Rule. The FTC will likely consider appealing the Ryan LLC decision, and possibly others. While it is too early to tell whether such an appeal would ultimately succeed, we know that at least one court has issued an FTC friendly ruling. So, employers should continue to follow applicable state laws regarding non-competes and monitor the status of the current FTC litigation (as we will here at FMJ). If you have questions or concerns about any of these ongoing changes, please reach out to FMJ’s HR & Employment Law Practice Group.
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