On August 20, 2024, the U.S. District Court for the Northern District of Texas in Ryan LLC v. Federal Trade Commission set aside the Federal Trade Commission’s (“FTC”) Non-Compete Rule, as promulgated in 16 C.F.R. § 910.1-6. This decision, that impacts the entire United States, marks a pivotal moment in the ongoing debate surrounding the use and enforcement of non-compete agreements in the United States and creates a potential divergence in the Circuits setting up a possible Supreme Court challenge.
Non-competition clauses are contractual provisions that restrict employees from working for competitors or starting similar businesses for a specified period after leaving employment. These clauses are sometimes important to employers because they are thought to help protect a company’s confidential information, trade secrets, and customer relationships, while also preventing unfair competition from former employees who may leverage insider knowledge to gain an advantage in the marketplace.
From the employee perspective, non-competition clauses are often considered an unfair restraint on an employee’s ability to move to a new job, potentially for better pay or promotion. This limitation on work mobility and career opportunities potentially hinders an individual’s ability to earn a living in their chosen field. Additionally, these clauses may stem from an imbalance of power between employers and employees, as workers may be compelled to accept unfavorable terms, remain in their jobs due to the fear of legal repercussions if they seek employment elsewhere within their industry.
The FTC’s Non-Compete Rule, finalized earlier this year after a prolonged comment period, aimed at broadly prohibiting employers from entering into non-compete clauses. It went so far as to require employers to rescind most existing non-compete clauses. The rule was part of the FTC’s efforts to promote competition and protect workers’ rights.
The Texas court found that the FTC exceeded its statutory authority to issue a “substantive rule” in promulgating the Non-Compete Rule. It determined that Congress had not granted the FTC the power to promulgate substantive rules of this nature. The Court’s ruling is a significant blow not only to the likelihood of the Non-Compete Rule taking effect, but also to the FTC’s interpretation of the agency’s substantive rule-making authority.
The District Court also found that the rule violated the APA’s “arbitrary and capricious” standard. It concluded that the rule “is unreasonably overbroad without a reasonable explanation . . . and imposes a one-size-fits-all approach with no end date[.]” The Court held the FTC’s rule amounted to a “sweeping prohibition” of non-competes and opined that “no state has enacted a non-compete rule as broad as the FTC’s Rule.” This conservative, “pro-business,” court concluded the rule does not fall “within a zone of reasonableness” and entered judgment in favor of the Plaintiffs, setting aside the rule and suspending its September 4, 2024, effective date.
Employers will also be keeping a close eye on parallel litigation in Florida (Properties of the Villages, Inc. v. FTC) and Pennsylvania (ATS Tree Services, LLC v. FTC). As these varying cases loom, we will need to wait and see whether the Supreme Court will decide to take up the issue.
For now, attention will likely shift back to state-level regulations on non-compete agreements, which vary significantly across jurisdictions. While some states strictly enforce broad non-competition provisions, others, like California, outright prohibit them. The Ryan LLC v. Federal Trade Commission decision underscores the ongoing tension between the circuits along with federal regulatory authority and the limits of agency power.
The Court’s decision to set aside the FTC’s Non-Compete Rule nationwide creates further uncertainty for businesses and employees who were preparing to comply with the FTC’s rule. As this case likely moves through the appeals process, employers and employees alike should closely monitor developments and be prepared to adapt their practices accordingly. The issue is likely to be appealed, potentially through to the Supreme Court, so stay tuned.
Bennett & Belfort will continue to monitor the ongoing litigation and any updates to federal and state efforts to regulate non-compete agreements that impact our business and employment law practice.
