Navigating the Recent Court Ruling on the FTC’s Non-Compete Rule: What Employers Need to Know

by | Sep 5, 2024 | Business Services, Labor and Employment

In a recent legal development, a federal court halted the Federal Trade Commission’s (“FTC”) Non-Compete Rule, which aimed to make most non-compete agreements unenforceable.

The FTC’s Non-Compete Rule, which had been set to take effect on September 4, 2024, sought to prohibit employers from entering into non-compete agreements with workers and required, with limited exceptions, the rescission of existing non-compete clauses. The rule was part of the FTC’s broader effort to promote competition and protect workers from restrictive employment practices.

Recently, however, the United States District Court for the Northern District of Texas in Ryan, LLC v. Federal Trade Commission issued a preliminary injunction enjoining the new rule from taking effect. In its ruling, the Court granted summary judgment in favor of plaintiffs, Ryan, LLC and several business associations, challenging the new rule, concluding that the FTC exceeded its statutory authority in promulgating the Non-Compete Rule and found the rule to be arbitrary and capricious. As a result, the court set aside the rule, preventing it from taking effect “on its effective date of September 4, 2024, or thereafter.”

The Court’s decision was based on two key points:

  1. Statutory Authority: First, the court determined that the FTC lacked the authority to issue substantive rules regarding unfair methods of competition under Section 6(g) of the FTC Act.
  2. Arbitrary and Capricious: Second, the court held the rule to be arbitrary and capricious in violation of the Administrative Procedure Act’s (“APA”) standard, finding the rule unreasonably overbroad with its one-size-fits-all approach. Among other things, the court took issue with the FTC’s failure to consider less disruptive alternatives to the rule, noting the rule is not supported by sufficient evidence or a reasonable explanation.

Implications for Employers

With the FTC’s Non-Compete Rule set aside, employers may continue to use reasonable and narrowly tailored non-compete agreements for the time being. However, the FTC is likely to appeal this decision and it is essential for employers to stay up to date on these emerging legal developments. Here are some steps employers should consider:

  1. Review Existing Non-Compete Agreements: Ensure that current non-compete agreements are reasonable in scope, duration, and geographic reach. They should be tailored to protect legitimate business interests without imposing undue restrictions on employees.
  2. Stay Informed on State Laws: Non-compete agreements are primarily governed by state law, and states vary widely in their enforcement and regulation of these agreements. For instance, Indiana and Illinois have different requirements for non-compete agreements to be valid and enforceable. It is important that you stay updated on the laws the states where you do business and any changes that may affect the enforceability of non-compete clauses.
  3. Consider Alternatives: Explore other methods to protect your business interests, such as non-disclosure agreements (NDAs), non-solicitation agreements, and confidentiality agreements. These alternatives can provide protection without the same level of restriction as non-compete clauses.
  4. Consult Legal Counsel: Given the complexity and variability of non-compete laws, it is advisable to consult with legal counsel to ensure your agreements comply with current legal standards and to receive guidance on best practices.
  5. Monitor Future Developments: The legal landscape surrounding non-compete agreements is continually evolving. Keep an eye on future regulatory actions and court rulings that may impact the use of non-compete clauses.

The recent court ruling setting aside the FTC’s Non-Compete Rule is a significant development for employers, but it will likely not be the final decision. We will continue to help to keep you informed on legal developments so you can navigate this ever-changing landscape, and effectively protect your business interests.

More about Schuyler D. Geller

More about Schuyler D. Geller

Schuyler D. Geller is a member of the firm’s litigation and business practice groups where he represents businesses and individuals in complex commercial, regulatory, and employment litigation. Mr. Geller is licensed to practice in Illinois and Indiana and admitted to practice before the Northern and Central Districts of Illinois, Northern and Southern Districts of Indiana, the Federal Trial Bar for the Northern District of Illinois, and the U.S. Tax Court.