FTC Issues Final Rule Banning Employment-Related Non-Compete Agreements. What’s Next?

By Sally A. Piefer - Lindner & Marsack, S.C.

August 21, 2024

As we previously indicated, earlier this year the FTC issued a Final Rule which would have made nearly all non-compete agreements unenforceable. The Final Rule was slated to go into effect on September 4, 2024. In addition to making most non-competes illegal, the Final Rule required employers to provide written notice to employees who were subject to the offending non-compete agreements.
 
Almost immediately lawsuits were filed opposing the FTC’s Final Rule. Within days, two different lawsuits were filed in Texas and one was filed in Pennsylvania. Two months later, another lawsuit challenging the Final Rule was filed in Florida.
 
In one of the Texas lawsuits, Ryan LLC v. FTC, the court originally granted the plaintiffs (and intervenors) a preliminary injunction and concluded that there was validity to the argument that the FTC exceeded its authority by issuing such a sweeping rule. Specifically, the court concluded that Section 6(g) of the FTC Act does not give the FTC the authority to issue substantive rules (as opposed to procedural rules). The court also concluded that the FTC’s Final Rule was arbitrary & capricious and violated the Administrative Procedures Act (APA), in part because it imposed a one-size-fits-all approach.
 
As to the scope of injunctive relief, while the court acknowledged that in the past nationwide relief has been issued in other cases, the court concluded that the Ryan case did not merit nationwide relief. Specifically, the court noted that the plaintiffs had “offered virtually no briefing (or basis) that would support ‘universal’ or ‘nationwide’ injunctive relief.” With respect to the intervenors, the court noted that they also had failed to brief “associational standing” on behalf of their members, and “[w]ithout such developed briefing,” the court declined to extend the injunctive relief. The preliminary injunction was therefore limited only to the plaintiffs and intervenors.
 
The lawsuit in Pennsylvania reached a different result. In that case, ATS Tree Services, LLC v. FTC, the plaintiffs also sought to prevent the Final Rule from taking effect by moving for a preliminary injunction. The Pennsylvania court, however, concluded that the plaintiffs failed to demonstrate irreparable harm in the absence of injunctive relief and that ATS had not demonstrated a likelihood of success on the merits of its claims. The court denied the preliminary injunction. The Pennsylvania court explicitly rejected the argument that the FTC had exceeded its authority by banning all non-compete clauses.
 
The plaintiffs in the Florida lawsuit, Properties of the Villages, Inc. v. FTC, also sought a preliminary injunction. Like the Ryan court, the court in the Villages case issued a preliminary injunction – and limited its scope to the plaintiffs in the case.
 
Back in the Ryan case in Texas, the parties filed cross motions for summary judgment. The court set an August 30th hearing date and many believed that a decision on the Final Rule would be issued on the eve of the Labor Day weekend—just days before the Final Rule was slated to become effective across the nation. Several outcomes were possible – (1) the court could grant judgment in favor of the plaintiffs (and intervenors) and issue a nationwide permanent injunction invaliding the Final Rule; (2) the court could follow the preliminary injunction and invalidate the Final Rule only as to the plaintiffs and intervenors; or (3) the court could find that the FTC did in fact properly implement the Final Rule.
 
In a surprising move, the Ryan court issued a decision yesterday, about 10 days earlier than anticipated. The court concluded that the FTC exceeded its statutory authority in implementing the Final Rule. Specifically, the court concluded that the FTC Act does not provide the FTC with the authority to make substantive rules with respect to unfair methods of competition. The court also concluded the Final Rule was arbitrary and capricious because it is “unreasonably overbroad without a reasonable explanation.” Here, the court found that the Final Rule’s one-size-fits-all approach was not reasonable, and that the FTC failed to explain why it chose to implement a sweeping prohibition rather than targeting specific, harmful non-competes.
 
As to final resolution, the Ryan court acknowledged that the APA required the court to set aside agency actions which are in excess of statutory authority or which are arbitrary and capricious. Although the FTC argued that final relief should be limited to the plaintiffs (and intervenors), the court recognized that the Final Rule would affect persons in all judicial districts, and invalidated the Final Rule in its entirety. As a result of yesterday’s decision, employers need not send any notices to employees in anticipation of the September 4th date because the Final Rule will not go into effect.
 
We suspect that employers are not out of the woods yet. Given that the ATS court in Pennsylvania concluded that the FTC did in fact have authority to issue the Final Rule, we anticipate that an appeal will be forthcoming, and the processing of that appeal may very well depend on which party wins the presidential election in November. It is possible that the U.S. Supreme Court will ultimately need to weigh in on whether the Final Rule is enforceable. Stay tuned for further developments.
 
For now, employers should continue to rely on applicable state law to determine whether restrictive covenants are enforceable. We caution employers that restrictive covenants are not intended to be one-size-fits-all, and these agreements should be carefully drafted so that they are as narrow as possible.

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