Legal Update

On August 20, 2024, the United States District Court for the Northern District of Texas issued an order blocking the FTC's rule banning non-competes in certain situations (the "Non-Compete Rule"). The Non-Compete Rule was scheduled to take effect on September 4, 2024; however, in Ryan, LLC v. Federal Trade Commission, the court has now set aside the Non-Compete Rule on a nationwide basis. Employers can rest easy for now and may continue to use non-competes with employees in accordance with state laws.

How Did We Get Here?

Earlier this summer, the Ryan court temporarily enjoined the Non-Compete Rule but declined to extend that ruling beyond the plaintiffs in that particular case. Subsequently, a different federal court in Pennsylvania sided with the FTC, finding the FTC had the authority to issue the Non-Compete Rule and that the plaintiff had failed to show it would be irreparably harmed by the Non-Compete Rule. Then, just last week, the Middle District of Florida agreed with Texas and blocked the Non-Compete Rule, but only as to the specific plaintiff in the case.

The Ryan Court Ruling

The Ryan court has now provided some certainty (at least temporarily) to employers after an unsettled summer, finding that (1) the Non-Compete Rule exceeded the FTC's statutory authority because the FTC is only authorized by Congress to issue procedural rules, but not substantive rules, and (2) the Non-Compete Rule is arbitrary and capricious because it is unreasonably overbroad without a reasonable explanation for its breadth.

What's Next?

The FTC will likely appeal the Ryan court's decision to the Fifth Circuit, which is historically employer-friendly and is unlikely to side with the FTC. After that, the next step would be to take the fight to the Supreme Court.

What Employers Should Do Now

• We are now back to the status quo prior to the Non-Compete Rule, where state-specific rules will control whether a covenant not to compete is enforceable and allowed. Soon after the Ryan court issued its ruling, the FTC noted the outcome would "[n]ot prevent the FTC from addressing non-competes through case-by-case enforcement actions," so now is a great time to ensure any existing agreements are tailored to the appropriate state laws.
• Take the time now to inventory all agreements containing non-competes. Although the chance that an appeals court could resurrect the Non-Compete Rule is low, if it does happen, it will be helpful to have a list of all impacted agreements in case a later notice regarding enforceability is ever required.
• Employers should continue to assess the necessary level of restrictions 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 following the fallout of the Non-Compete Rule.

If you have any questions, please do not hesitate to reach out to a member of the Morris, Manning & Martin, LLP Employment Team.