On August 20, 2024, Judge Ada Brown of the U.S. District Court for the Northern District of Texas issued a permanent injunction setting aside the Federal Trade Commission’s final rule banning non-compete agreements in Ryan LLC v. FTC.  Last month, the court afforded temporary relief as to the named plaintiffs only by issuing a preliminary injunction enjoining the rule’s application against them.  In its most recent decision, the court specified that its ruling has permanent, nationwide effect.  An appeal is likely to follow.

Set to take effect on September 4, 2024, as previously discussed here, the final rule would have prohibited enforcement of non-compete covenants with respect to nearly all U.S. workers and would have required employers to notify affected workers that their non-competes are unenforceable.  The rule provided only limited exceptions for non-competes entered into with “Senior Executives” (as defined in the rule) prior to the rule’s effective date and non-competes entered into in connection with the sale of a business.  In reaching its decision, the Texas court ruled that the FTC lacks substantive rulemaking authority as to unfair methods of competition, and that the FTC’s promulgation of the final rule was arbitrary and capricious because it was unreasonably overbroad and lacked reasonable explanation.

The Texas case is one of three lawsuits currently seeking to enjoin the FTC’s enforcement of the final rule, and there seems to be a significant possibility of conflicting rulings on the merits.  While the district court in the Middle District of Florida may also conclude that the rule is invalid, having granted a preliminary injunction as to the named plaintiffs earlier this month, by contrast, the district court in the Eastern District of Pennsylvania appears poised to uphold the rule, having issued a dueling decision on July 23, 2024 finding that the FTC acted within its statutory authority in promulgating the non-compete ban.

Following Tuesday’s decision, an FTC spokesperson indicated that the FTC is “seriously considering” a potential appeal of the Texas court’s decision.  Though litigation remains ongoing, the pending cases could result in an eventual circuit split, making the matter especially ripe for U.S. Supreme Court consideration, particularly given the Court’s recent appetite to tackle cases of high constitutional and administrative significance.  And even in the absence of such a split, the Supreme Court often grants the government’s request to review decisions invalidating federal law.

Accordingly, employers should remain mindful that the final rule may still, eventually, take effect.  Of particular significance to commercial decision making today, if the government ultimately prevails on appeal, there is a risk that the rule’s “effective date” for purposes of determining which non-compete covenants with Senior Executives are exempt would remain September 4, 2024, the date that the rule was originally scheduled to take effect.  Accordingly, companies that were planning to finalize non-competes with Senior Executives prior to September 4, 2024 should stay the course, to the extent practicable.  However, employers are not required to provide to workers the notice contemplated by the rule unless the injunction is lifted.

Companies should likewise remain cognizant that, notwithstanding yesterday’s decision, non-compete practices remain subject to existing federal and state laws.  Remarks made yesterday by an FTC spokesperson suggest that the FTC may continue to challenge non-competes through case-by-case enforcement actions.  In addition, state laws that restrict, and in some cases, prohibit, non-compete covenants continue to apply with full force.  Non-compete covenants in recent years have come under increasing scrutiny and been subject to new regulations at the state level.  This trend is likely to continue in light of yesterday’s decision.

Subject to these important caveats, companies may lawfully continue their historical practices with respect to non-compete covenants while the nationwide injunction is in effect.  In light of the risks outlined above, however, it remains prudent for companies to consider alternative means of protecting confidential information, trade secrets, business relationships and goodwill, including through appropriate confidentiality and non-solicitation covenants.

This post comes to us from Wachtell, Lipton, Rosen & Katz. It is based on the firm’s memorandum, “Federal Court Issues Nationwide Injunction Blocking FTC Non-Compete Ban,” dated August 21, 2024.