As we discussed here, in April of this year, the Federal Trade Commission (“FTC”) adopted a final rule (the “Rule”) that would have, among other things, created a near total ban on any new non-competition agreements between employers and employees and would have rendered most existing non-competition agreements unenforceable upon the Rule’s effective date.
The Rule was promptly challenged in several courts across the country with mixed results. In one of those cases, Ryan, LLC filed suit challenging the Rule in the Northern District of Texas and was later joined by the U.S. Chamber of Commerce and other business organizations. On July 3, 2024, the Texas court granted a preliminary injunction staying enforcement of the FTC’s rule, but only as to the parties in the case.
Yesterday, the Texas court issued a final judgment that set aside the Rule, because it concluded that the FTC exceeded its statutory authority in implementing the Rule and that the Rule is arbitrary and capricious. Based on the ruling of the Texas court, this decision has “nationwide effect” and affects companies and “persons in all judicial districts equally.” Ryan, LLC v. Federal Trade Commission, Case No. 3:24-cv-00986-E, Memorandum Opinion and Order, P. 26 (Aug. 20, 2024). In other words, the ruling of the Texas court means that the FTC’s Rule “shall not be enforced or otherwise take effect on September 4, 2024, or thereafter.”
Moving forward, the FTC may appeal the Texas court’s ruling, but for now businesses that were taking steps to comply with the Rule can pause those efforts. However, given the increased scrutiny of non-compete agreements and other restrictive covenants at the state and federal levels—see, for example, our update on recent decisions by the National Labor Relations Board making it riskier to enter restrictive covenants with non-supervisory employees—employers should continue to consult with employment counsel to analyze whether their current restrictive covenants are valid under all applicable laws and update them as necessary.
