On August 20, 2024, a Texas federal court imposed a nationwide injunction barring the implementation of a Federal Trade Commission (FTC) regulation that would have invalidated existing non-compete agreements. The case, *Ryan LLC v. Federal Trade Commission*, resolves uncertainty among employers that had arisen since the FTC finalized its non-compete regulation (Final Rule) in April 2024. The FTC’s Final Rule was scheduled to become effective on September 4, 2024. Although the FTC may immediately appeal the Texas federal court’s injunction, the Final Rule will not take effect throughout the United States as scheduled.
Currently, various courts are divided over the issue, and these legal battles are likely to move to appeal. In the meantime, employers do not need to distribute FTC-required notices advising employees that their non-compete agreements are unenforceable.
The Final Rule was designed to bar enforcement of existing non-compete agreements in nearly all situations. It also aimed to prohibit employers from creating most new non-compete agreements. According to the FTC, such agreements are inherently anti-competitive. However, many employers see non-compete agreements—restrictive covenants entered into voluntarily with new or existing employees to prevent unfair competition—as vital tools to protect their business interests. The FTC has been accused of overreaching and exceeding its administrative authority without congressional approval, and other agencies are now facing similar scrutiny.
Various legal challenges have been made since the Final Rule was issued, but *Ryan LLC* is the first case to issue a nationwide injunction against the FTC’s implementation of the non-compete rule. The court held that the FTC exceeded its statutory authority by promulgating the Final Rule, which the court deemed “arbitrary and capricious.” According to the court, the Final Rule was “unreasonably overbroad without a reasonable explanation” and imposed a “one-size-fits-all approach with no end date.” The court identified these flaws as characteristic of “an unlawful agency action” and concluded that the proper remedy under the Administrative Procedures Act (APA) was to set aside the FTC’s Final Rule in its entirety.
The FTC has indicated that it will appeal the decision of the Fifth Circuit Court of Appeals. The Biden Administration had provided the impetus for the FTC to outlaw non-compete agreements.
Although the Final Rule is enjoined, employers should nonetheless be prepared for their non-compete agreements to face extra scrutiny from courts in the future. Given the heightened publicity and recent confusion surrounding such contracts, companies wanting to prevent unfair employee competition should consult with experienced employment counsel. These agreements must be carefully crafted and tailored to an employer’s specific circumstances.
If you have questions about the FTC’s Final Rule or the effect of the court’s nationwide injunction, contact Bob Dunlevey or Marc Fleischauer for more information. Bob Dunlevey serves as Senior Counsel, and Marc Fleischauer was recently appointed partner in Taft/Law’s Labor/Employment Group. Both work in the firm’s Dayton office. Taft/Law also has offices in Cincinnati, Cleveland, Columbus, and Delaware, Ohio. For more information about Taft/Law and its services, visit www.taftlaw.com.