Navigating the FTC’s Noncompete Rule: Updates and Legal Challenges
Aug 12, 2024The FTC’s Noncompete Rule on Track to Take Effect on September 4
Court challenges haven’t stopped it yet, but still could
On April 23, 2024, the Federal Trade Commission (FTC) voted 3-2 to approve a final rule banning noncompete agreements with virtually all employees. The rule prohibits all noncompete agreements after the effective date and invalidates nearly all noncompete agreements existing before the effective date. The rule also requires that employers communicate this information — that an employee’s existing noncompete agreement is no longer enforceable — to all affected employees by the effective date. The rule is scheduled to take effect on September 4, 2024.
Challenges to the Rule
Since the rule’s publication, at least three legal challenges have been filed in federal courts. So far, no challenge has successfully stopped the rule from taking effect nationwide.
On July 3, 2024, in Ryan, LLC v. FTC, Judge Ada Brown of the United States District Court for the Northern District of Texas granted a preliminary injunction preventing the FTC from enforcing the noncompete rule until full adjudication of the merits. The court limited its injunction so that it only prohibits the FTC from enforcing the rule against the plaintiffs in the case. In the court’s preliminary ruling, Judge Brown said that “the text, structure, and history of the FTC Act reveal that the FTC lacks substantive rulemaking authority with respect to unfair methods of competition under Section 6(g).” The court said that it plans to issue a final ruling in the Ryan case before August 30. The court could again provide relief for the plaintiffs only, vacate the rule, or issue a nationwide injunction.
More recently, on July 23, 2024, Judge Kelley Brisbon Hodge of the United States District Court for the Eastern District of Pennsylvania denied the plaintiff’s request for a preliminary injunction. In ATS Tree Services, LLC v FTC, Judge Hodge concluded that the FTC has the legal authority to issue “procedural and substantive rules as is necessary to prevent unfair methods of competition.” The court also held that the plaintiff had not established that it would suffer irreparable harm if the rule went into effect.
In addition, a similar case is pending in the United States District Court for the Middle District of Florida (Properties of the Villages v. FTC). In this case, the plaintiff seeks a preliminary injunction to stay the rule’s effective date, arguing that the rule exceeds the FTC’s statutory authority. The plaintiff also claims the rule’s impact would “reshape the contractual relationships between business and individuals on an unprecedented scale.”
Given the importance of the rule, it is likely that final rulings at the district court level will be appealed, and there could be a temporary period where two (or more) inconsistent appellate decisions are in play.
What Next?
The rule will surely be the subject of additional litigation efforts and appeals, and the United States Supreme Court may eventually weigh in. However, as of today, the FTC’s noncompete rule is scheduled to go into effect on September 4, 2024, unless a court stays its effective date nationwide or issues a nationwide injunction against the FTC’s enforcement of the rule.
In the coming weeks, employers should prepare to comply with the rule while tracking these legal developments. Employers should work with counsel to identify which noncompete agreements are affected by the rule and be prepared to notify both current and former employees who have signed an agreement about the new rule and how it affects them.
If you have any questions or concerns about complying with the FTC’s new rule—or wish to explore the evolving role of restrictive covenants in your overall business strategy—don’t hesitate to contact Orr & Reno for assistance.
