Following the April 23, 2024 vote by the Federal Trade Commission (FTC) to issue a rule largely banning non-compete agreements in employment agreements, there has been continuing uncertainty as to whether that rule will actually go into effect.
Almost immediately after the rule was issued, several companies and industry groups filed lawsuits seeking to block the rule’s application. The central argument articulated by these litigants is that the FTC lacks the statutory rulemaking authority to issue the non-compete “ban.” As of now, the rule remains scheduled to go into effect on September 4, 2024.
These cases have started to progress their way through the courts. In particular, there have been two recent decisions of note by federal courts regarding the enforceability of the FTC’s rule. After these decisions, however, uncertainty remains.
On July 3, 2024, the U.S. District Court for the Northern District of Texas in Ryan, LLC v. FTC granted a preliminary injunction blocking the application of the FTC’s noncompete “ban,” but limited the injunction to the named parties in that lawsuit. Significantly, as part of the court’s analysis, it concluded that the “text and structure of the FTC Act reveal the FTC lacks substantive rulemaking authority with respect to unfair methods of competition…” and that there is a “substantial likelihood the Rule is arbitrary and capricious…” As noted, however, the court declined to extend the injunction nationwide, so its ruling did not directly affect employers who are not parties to that suit. The court cited the need for a more fulsome analysis and briefing by the parties regarding whether there are “appropriate circumstances that would merit nationwide relief.” Notably, the court expects to issue a ruling on the merits of this action, which may include a further ruling on the question of nationwide relief, by August 30, 2024.
On July 23, 2024, about three weeks after the Ryan, LLC decision, the U.S. District Court for the Eastern District of Pennsylvania in ATS Tree Services v. FTC denied a bid by a party to block the FTC’s ban. Among other things, the court held that the FTC’s rule regarding the non-compete “ban” likely did not exceed its rulemaking authority. Unlike in the Texas decision, the court found that the FTC’s rule was consistent with the FTC’s statutory authority. In other words, this decision appears to directly conflict with the conclusions of the court in the Ryan, LLC case.
Unfortunately, these conflicting decisions have not provided clarity for employers (or employees) as the September 4, 2024 effective date for the FTC rule fast approaches. With this imminent effective date and the continuing uncertainty, prudent employers should prepare for the rule’s possible implementation. Steps that employers should consider taking at this point include: (i) identifying current agreements in place that contain non-compete provisions; (ii) determining if other types of provisions are or should be put in place, such as confidentiality, non-disclosure, and non-solicitation provisions, to protect employers’ interests; and (iii) preparing to provide notice to current and former employees regarding their existing non-compete provision (a requirement of the FTC’s rule), including both writing the notice about the FTC’s rule and gathering contact information for those to whom the notice may need to be provided.
In the meantime, we are continuing to closely monitor developments as these (and other) cases that are challenging the rule’s implementation progress through the courts.