Yesterday, a federal court in Texas issued a nationwide injunction preventing the Federal Trade Commission’s rule banning nearly all employee non-compete agreements from taking effect on September 4, 2024. The case, Ryan LLC et al. v. Federal Trade Commission, Case No. 3:24-cv-00986 (N.D. Tex.), was brought by a Texas tax preparation company and the U.S. Chamber of Commerce. This ruling was widely expected because the court issued an order in July 2024 that blocked the FTC from applying the rule as to the plaintiff, but signaled that it would decide whether to issue a broader injunction before the FTC rule took effect. It followed through, and you can read the court’s opinion here.

The court’s ruling rested on two separate grounds. First, the court ruled that the FTC improperly exceeded its statutory authority under the Federal Trade Commission Act by issuing a substantive rule governing unfair methods of competition. The court found that the FTC Act authorized the FTC to issue only procedural rules, not “substantive rules regarding unfair methods of competition.” The Court noted that “[t]he role of an administrative agency is to do as told by Congress, not what the agency thinks it should do.” Second, the court found that the rule itself was invalid under the Administrative Procedures Act because it was “arbitrary and capricious” in a number of ways. According to the court, the FTC adopted an overly-broad “one-size-fits-all approach with no end date” that was based on a handful of “inconsistent or flawed” economic studies and failed to consider the positive impacts of non-competes or other alternatives to an outright ban.

The court’s decision means that—for now—there is no nationwide ban of non-competes. However, the ultimate fate of the FTC rule remains uncertain. The FTC immediately issued a statement that it is considering an appeal. The U.S. Supreme Court may ultimately decide the fate of the FTC rule, considering the fact that the rule was previously upheld by a Pennsylvania federal court.

Employers that have, or are considering, non-competes should be aware that they are still subject to existing state laws regulating, and in the case of a few states banning, many types of non-competes. Given the uncertain fate of the FTC rule, some states might now be motivated to enact new legislation to ban or curtail non-competes. Furthermore, the FTC may still pursue enforcement actions against employers on a case-by-case basis; the FTC’s enforcement (as opposed to rulemaking) authority was not impacted by the recent ruling. Now would be a good time for employers to catalog and review their existing portfolio of non-competes (including agreements, such as confidentiality agreements, which could in effect function as a non-compete) to be prepared if an appeals court breathes new life into the FTC rule and to assess risk of an FTC investigation or actions under state law.

Dykema is closely monitoring the progress of the legal challenges to the rule to provide guidance to clients with non-competes and other restrictive covenants.

For more information about the status of the FTC rule or existing laws impacting non-competes, please contact Jim Hermon, Howard Iwrey, Cody Rockey, Ray Bissmeyer, or your Dykema relationship attorney.