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Alerts and Updates

Federal Court Stops the FTC Noncompete Rule from Being Enforced or Taking Effect

August 21, 2024

Federal Court Stops the FTC Noncompete Rule from Being Enforced or Taking Effect

August 21, 2024

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Although the FTC may choose to appeal, the noncompete rule will not take effect unless an appeal by the FTC is successful. 

On August 20, 2024, the United States District Court for the Northern District of Texas, in the Ryan lawsuit, struck down a final Federal Trade Commission (FTC) rule―which was set to go into effect on September 4, 2024, and ban noncompetition agreements for virtually all U.S. workers―holding that the rule shall not be enforced by the FTC or take effect as to any workers or employers.

What Is the FTC Noncompete Rule?

As reported in our prior Alerts (including on April 23, July 3 and 24, and August 8, 2024), the FTC voted 3-2 in April 2024 to approve a final rule that would have taken effect on September 4, 2024:

  • Banning noncompete agreements with virtually all workers after the effective date;
  • Invalidating existing noncompetes with all workers except senior executives; and
  • Requiring employers to send a clear and conspicuous notice to affected workers, by the effective date, that the worker’s noncompete clause will not and cannot be legally enforced. 

The noncompete rule would have displaced conflicting state laws.

Legal Challenges to the Noncompete Rule Until Now

As reported in detail in our August 8 Alert, until now, as the effective date inched closer, legal challenges to the noncompete ban were unsuccessful in securing an order enjoining, staying and/or invalidating the ban for all employers. 

On July 23, 2024, in the ATS Tree Services case, the Eastern District of Pennsylvania held that the noncompete rule was valid and enforceable and refused to preliminarily enjoin its enforcement. In contrast, on July 3, 2024, the Northern District of Texas in Ryan issued an order preliminarily enjoining the FTC from enforcing the noncompete ban as to the named parties in that case, but refused to issue a nationwide injunction or stay that would apply to other employers.

The August 20 Order

In its August 20, 2024, opinion and order granting the plaintiff’s and plaintiff intervenors’ motion for summary judgment, and denying the FTC’s motion for summary judgment, the Ryan court expanded the scope of its prior preliminary injunction order. 

The court concluded that the “FTC exceeded its statutory authority in implementing the Rule, and the Rule is arbitrary and capricious,” declining to consider the parties’ remaining arguments as unnecessary. Thus, the court set aside the noncompete rule in its entirety, as to all workers and employers, ordering that the rule shall not be enforced or otherwise take effect.

Drawing on the Supreme Court of the United States’ recent decision in Loper Bright Enters. v. Raimondo, 144 S. Ct. 2244 (2024), the court concluded:

Having concluded that (i) the FTC promulgated the Non-Compete Rule in excess of its statutory authority, and (ii) the Rule is arbitrary and capricious, the Court must “hold unlawful” and “set aside” the FTC’s Rule as required under § 706(2). As to the FTC’s argument that relief should be limited to the named Plaintiffs—the APA does not contemplate party-specific relief. See generally 5 U.S.C. § 706(2). “As [the Fifth Circuit] put it in a couple of recent cases, setting aside agency action under § 706 has ‘nationwide effect,’ is ‘not party-restricted,’ and ‘affects persons in all judicial districts equally.’” Braidwood Mgmt., Inc. v. Becerra, 104 F.4th 930, 951 (5th Cir. 2024) (internal citations omitted). Thus, the Court hereby holds unlawful and sets aside the Rule. See 16 C.F.R. § 910.1–.6. The Rule shall not be enforced or otherwise take effect on its effective date of September 4, 2024, or thereafter. See 16 C.F.R. § 910.1–.6. [Emphasis added.]

What Does the Ruling Mean for Employers?

  • Although the FTC may choose to appeal, the noncompete rule will not take effect unless an appeal by the FTC is successful. 
  • As such, employers should not send the notice the noncompete rule would have required or modify their agreements to comply with the now-invalidated rule.
  • Employers still must comply with any applicable state laws concerning noncompetes and other restrictive covenants, and should work with legal counsel to ensure compliance with those requirements.

For More Information

If you have any questions about this Alert, please contact Lawrence H. Pockers, Shannon Hampton Sutherland, any of the attorneys in our Non-Compete and Trade Secrets Group, Sean P. McConnell, any of the attorneys in our Antitrust and Competition Group, any of the attorneys in our Employment, Labor, Benefits and Immigration Practice Group or the attorney in the firm with whom you are regularly in contact.

Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.