Update on FTC’s Rule on Non-Compete Agreements
Earlier this year, the Federal Trade Commission (“FTC”) issued a rule that largely prohibited employers from requiring employees to sign non-compete agreements (the “Non-Compete Rule”). The rule was set to take effect on September 4, 2024. However, on August 20, 2024, the United States District Court for the Northern District of Texas issued its final ruling in Ryan, LLC v. FTC, a case that challenged the FTC’s Non-Compete Rule. In its ruling, the court invalidated the Rule, meaning that non-compete agreements will continue to be valid and enforceable.
Background
The FTC is a federal agency charged with regulating commerce. The FTC was created by Congress and is granted certain statutory authority to regulate business in the United States. One of the areas that falls under the FTC’s purview is unfair trade practices.
In recent years, the FTC began looking at non-compete agreements. Eventually, the agency determined that the creation and enforcement of non-compete agreements was an unfair trade practice. The FTC used this determination as its basis for issuing the Non-Compete Rule.
Ryan LLC v. FTC
The plaintiff in Ryan challenged the Non-compete rule and argued that it had two basic flaws. First, it was arbitrary and capricious, based on the fact the FTC’s studies it relied on to reach its determination were inadequate. Second, the plaintiff argued that the FTC lacked the statutory authority to regulate non-compete agreements in general.
The Court agreed with the plaintiff in Ryan and held that the Non-Compete Rule was arbitrary and capricious as well as outside the authority granted by the FTC’s statutory mandate. Therefore, the court set aside the Non-Compete Rule in its entirety ensuring that it will not go into effect on September 4.
Takeaways
The court’s ruling is a final order in the case. The FTC may choose to appeal the ruling to the Fifth Circuit Court of Appeals. However, such an appeal would take months if not years, and the Non-compete Rule will not be enforced in the interim. If there is no appeal, the Non-Compete Rule is effectively dead.
However, given that non-compete clauses are in the FTC’s crosshairs, it is certainly possible that the agency will try to issue a new rule that would be able to pass judicial review. It is also possible that Congress could pass a law either banning non-competes or expressly giving the FTC authority to regulate them. That possibility is less likely in the near-term, given upcoming elections and the current partisan makeup of Congress.
But for the present, employers can continue their usual practices concerning non-compete clauses in employment contracts. While such clauses are not prohibited by the FTC Non-Compete Rule, there are a multitude of state laws and judicial decisions that constrain and delineate whether such clauses are valid and enforceable. In broad terms, non-compete clauses must be reasonably drafted to protect the legitimate interests of employers without being overly restrictive on an employee’s ability to work. Non-compete clauses need to be reasonable as to the length of time they are in effect, the geographic area they cover, and the scope of the prohibited competitive behavior.
If your company is currently using a PEO then you should contact them about this topic.
