On April 23, 2024, the Federal Trade Commission (“FTC”) adopted the “Non-Compete Rule,” severely limiting an employer’s ability to enter into non-compete agreements with employees and rendering most existing non-compete agreements unenforceable. The rule, which includes only a few narrow exemptions, was set to take effect on September 4, 2024, and would have superseded laws in all fifty (50) states that allow for the enforcement of non-compete agreements, effectively banning such agreements nationwide. On August 21, 2024, Federal Court Judge Ada Brown in the Northern District of Texas issued an Order holding the FTC’s Non-Compete Rule is unlawful and blocked the agency from enforcing it.
In Ryan LLC v. Federal Trade Commission, 3:24-cv-00986, the plaintiff sued the FTC to stop enforcement of the rule, alleging the agency exceeded its authority in adopting it and that the rule itself is arbitrary and capricious. Judge Brown agreed on both points. First, she noted the FTC was not empowered to create such a rule because the law enforced by the agency “limits the FTC’s ability to make rules dealing with unfair or deceptive practices—not unfair methods of competition.” (emphasis in the original). Accordingly, Congress did not intend to provide the FTC with the authority to create rules regulating non-compete agreements.
Additionally, Judge Brown found that even if the agency was empowered to adopt a rule on the subject of non-compete agreements, the adopted rule is arbitrary and capricious. The Court noted that in drafting the rule, the only data considered by the FTC was a few studies conducted in several states on the subject, which did not justify the adoption of a nationwide rule that is more restrictive than the current law in any state. “In sum, the Rule is based on inconsistent and flawed empirical evidence, fails to consider the positive benefits of non-compete agreements, and disregards the substantial body of evidence supporting these agreements.”
This ruling was not completely unexpected as Judge Brown previously had issued a preliminary injunction on July 3, 2024, but that injunction only limited the FTC’s ability to enforce the rule against the plaintiffs in this particular case. This new ruling stops the FTC from enforcing the Non-Compete Rule anywhere, meaning that the rule will no longer become effective on September 4, 2024. The FTC is likely to appeal this decision and there is still pending litigation on the subject in other jurisdictions, so the enforceability of the rule may ultimately be determined by the Supreme Court. For now, however, employers will not be prohibited from entering into or enforcing non-compete agreements.
The St. Louis employment attorneys at McMahon Berger have been representing employers across the country in labor and employment matters for over sixty years and are available to discuss these issues and others. As always, the foregoing is for informational purposes only and does not constitute legal advice regarding any particular situation as every situation must be evaluated on its own facts. The choice of a lawyer is an important decision and should not be based solely on advertisements.
