As discussed in our prior client alert found here on April 23, 2024, the U.S. Federal Trade Commission (FTC) issued a final rule banning non-competes for workers nationwide, subject to limited exceptions (the “Non-Compete Rule”). The Non-Compete Rule, which is slated to take effect on September 4, 2024, was immediately challenged by pro-business groups, including in a lawsuit filed on April 24, 2024, by the U.S. Chamber of Commerce and a tax services company, Ryan, LLC, in the U.S. District Court for the Northern District of Texas.
On July 3, 2024, the Texas District Court in Ryan, LLC v. Federal Trade Commission issued a preliminary injunction temporarily enjoining the rule as to the plaintiffs in that case, finding that the FTC exceeded its statutory authority in promulgating the Non-Compete Rule.
This Client Alert explains the highlights of the Ryan Court’s ruling, the expected next steps, and what employers should consider doing now.
Highlights of the Ruling
The Ryan Court made the following findings in temporarily enjoining the Non-Compete Rule:
- While Section 6(g) of the FTC Act gives the FTC some rulemaking authority, this only applies to “housekeeping” rules dealing with “organization procedure or practice,” as opposed to “substantive rules.” Therefore, the FTC exceeded its statutory authority in promulgating the Non-Compete Rule.
- The evidence submitted by the FTC – which focused on a handful of studies illustrating the effects of various state non-competes – did not warrant the Non-Compete Rule’s expansive ban, as no state has ever enacted a non-compete rule as broad as the FTC’s Non-Compete Rule.
- The Court noted that the Non-Compete Rule “imposes a one-size-fits-all approach with no end date, which fails to establish a rational connection between the facts found and the choice made.”
- Finally, the Court declined to issue nationwide injunctive relief, citing the fact that the plaintiffs offered no briefing as to why nationwide injunctive relief was necessary to provide them relief at this preliminary stage.
What Happens Next
The Ryan Court announced that it will make a final decision on whether to issue a permanent injunction on or before August 30, 2024, after the parties complete briefing on the merits, and just five days before the Non-Compete Rule is scheduled to take effect.
In the meantime, the Eastern District of Pennsylvania is scheduled to decide a similar challenge to the Non-Compete Rule by July 23, 2024. This court will not be obligated to follow the Ryan Court’s decision, and that Court’s decision could be either narrower or broader in scope than the Ryan Court’s decision.
It is expected that the FTC will appeal the Ryan Court’s decision (as well as the Pennsylvania district court’s decision if similar to Ryan), either at this preliminary stage or after permanent relief is granted, meaning that the decision is headed to the Fifth Circuit and potentially the Third Circuit as well. Although the Ryan Court’s preliminary injunction only applies to the plaintiffs in that case, Fifth Circuit precedent makes clear that the default relief for unlawful agency rules under the Administrative Procedure Act, 5 U.S.C. § 706, is that the agency rule be vacated, or set aside, and that such setting aside of the agency rule has nationwide effect. This precedent, coupled with the Supreme Court’s recent decision in Loper Bright Enterprises v. Raimondo, No. 22-1219, 2024 WL 3208360 (U.S. June 28, 2024), overruling longstanding case law requiring courts to give deference to agency decisions, means that, assuming the circuit courts agree with the Ryan Court’s finding that the FTC did not have authority to promulgate the Non-Compete Rule, the Non-Compete Rule will likely be vacated entirely.
What Employers Should Do Now
Until a court grants nationwide injunctive relief or otherwise vacates the Non-Compete Rule, employers should consider taking steps to prepare for the Non-Compete Rule to go into effect on September 4, 2024, including the following:
- Take inventory of which employees (both former and current) have signed employment covenant agreements containing non-compete provisions.
- Prepare a notice compliant with the Non-Compete Rule that can be circulated to your non-senior executive employees prior to the effective date of the Non-Compete Rule, assuming the Non-Compete Rule is not enjoined by that date.
- Take inventory of your existing employment covenant agreements to ensure they contain adequate protections outside of non-competes, including non-disclosure provisions, non-solicitation provisions, and provisions governing the ownership and assignment of intellectual property.
- Ensure that your c-suite level employees have signed enforceable non-compete agreements.
- Decide whether to include non-compete provisions in agreements with non-executive employees on a go-forward basis, with the understanding that you will need to provide employees notice that such provisions are enforceable prior to the effective date of the Non-Compete Rule, assuming the Non-Compete Rule is not enjoined by that date.
- Ensure that you have a severability clause in your current or future employment covenants agreements that contain noncompete provisions so that the other restrictive covenants remain intact if the Non-Compete Rule goes into effect.
- Ensure that your customer non-solicitation provisions are not drafted so broadly that they could be deemed to constitute an unenforceable non-compete provision.
- Assess the level of restrictions that are necessary to protect your business while allowing you to remain competitive in the market and attract new talent, given that a decreased tolerance for non-competes is likely even if the Non-Compete Rule is not ultimately implemented.
The MMM Employment Team is continuing to monitor developments related to the Non-Compete Rule, including the decisions as to the various legal challenges. For questions about the Non-Compete Rule, non-compete agreements, other restrictive covenant agreements in general, and recommended strategies for maximizing the protection of your Company while remaining competitive in the field, please contact the MMM Employment Team.
