Judge Issues Ruling to Halt Implementation of the FTC Noncompete Rule

On August 20, 2024, a federal judge in Texas set aside a controversial new Federal Trade Commission (FTC) rulethat would have 1) banned noncompete provisions in most contracts with workers and 2) required employers to send notices by September 4 informing most workers that any previous noncompetes are unenforceable. The ruling was welcome news for employers who only had a few weeks before it was to take effect, allowing employers across the country to continue to use non-compete agreements as their state laws allow.

In granting a summary judgment finding for the plaintiff in Ryan LLC v. FTC, Judge Ada E. Brown of the U.S. District Court for the Northern District of Texas held that the noncompete rule is unlawful based on two factors: 1) The FTC's lack of authority to issue substantive, rather than procedural, rules to address unfair methods of competition and 2) that the rule itself was "arbitrary and capricious" in violation of the Administrative Procedures Act Judge Brown noted that the rule imposed a "one-size-fits-all" approach with no end date, which did not bear a rational connection to the facts at issue and was based on "inconsistent and flawed empirical evidence, fails to consider the positive benefits of non-compete agreements, and disregards the substantial body of evidence supporting these agreements."

Unlike the court's July 3 preliminary injunctionthat only froze the rule for the named plaintiffs, this decision pauses implementation of the noncompete rule for employers nationwide and is the first substantive decision regarding the rule itself. As of the publishing date, the FTC has not yet indicated whether it will appeal the Ryan LLCruling, but the agency has indicated previously that it would likely seek appellate review or pursue other paths to limit noncompete agreements. A Florida federal district court has also preliminarily enjoined the non-Compete rule, while a Pennsylvania federal district court has refused to do so, suggesting a likelihood of a different result. Those proceedings thus put the focus on the Third, Fifth, and Eleventh Circuits and raise the possibility of circuit conflict, thus leading to a potential Supreme Court review.

The Court may have felt emboldened to make its decision in Ryan LLC v. FTCgiven the U.S. Supreme Court's recent ruling in Loper Bright Enterprises v. Raimondoto end Chevron deference, a doctrine which gave substantial deference to the rules and decision-making of federal agencies like the FTC.

The Ryanruling does not affect state laws governing noncompetes or other restrictive covenants. States have recently bolstered their own efforts to restrict noncompete clauses under state law by way of new legislation and more aggressive positions by state court judges with respect to enforcement of state noncompete clauses.

The Rhode Island and Maine legislatures each passed noncompete bills this year, although the bills were vetoed by each state's respective governor. Last year, the New York Legislature passed a noncompete bill, only to have it vetoed by Democratic Governor Kathy Hochul for "being too broad".

A new Washington State law, SB 5935, expands the state's already existing noncompete law effective in June. The new law includes worker-friendly amendments related to expanding the definition of noncompetes, minimum compensation, duration requirements, disclosure or consideration requirements, and garden-leave-type payments.

All told, agencies may wish to consider implementing a thorough review of existing employment agreements for compliance with state law requirements while monitoring federal and state litigation developments.

Have questions about the FTC noncompete rule or its associated litigation? Please contact Amanda Anderson, 4A's VP Government Relations & Sustainability.

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