CSG Law Alert: FTC’s Near Total Ban on Non-Competes Struck Down, With Nationwide Effect, By Texas District Court
As we predicted in our prior client alerts, Judge Ada E. Brown of the U.S. District Court of the Northern District of Texas has struck down the Federal Trade Commission’s (“FTC”) enactment of a new Rule on September 4, 2024, which would have effectively resulted in a nationwide ban on nearly all current and future employee non-competition agreements (with limited exceptions). On Tuesday, August 20, 2024, the Texas District Court entered a 27-page sweeping decision preserving the status quo of applicable law prior to FTC’s adoption of the Rule. Therefore, the Texas court’s decision leaves the 50-state landscape of state statutes, court decisions, and state regulations permitting or rejecting enforcement of non-competes in place.
Had it gone into effect, the FTC’s new Rule would have been the law of the land, effectively barring all but a narrow category of non-competes nationally. However, Judge Brown, ruling in the case Ryan, LLC v. Federal Trade Commission, Civil Action No. 3:24-CV-00986-E (N.D. Tex.), issued a permanent injunction barring enforcement of the FTC’s new Rule. In the striking decision, the Texas District Court held that (a) the “FTC lacks substantive rulemaking authority with respect to unfair methods of competition” and, therefore, it “has exceeded its statutory authority in promulgating the Non-Compete Rule,” and (b) the FTC acted in an “arbitrary and capricious” manner in adopting a rule outside its authority. Although some commentators suggested that the decision might be limited to the parties in the case, Judge Brown explicitly held otherwise, stating the decision has “nationwide effect,” is not “party restricted,” and “affects all persons in all judicial districts equally.”
The FTC will likely appeal the Court’s decision, first to the intermediate federal Court of Appeals and then to the U.S. Supreme Court, if needed. As we suggested previously, the final word on the FTC’s enactment of its Rule will take many months, if not years. In the meantime, employers can take proactive measures to protect their business interests.
First, employers should review and monitor the laws of the states where their employees are performing services to make sure any non-compete agreements they seek to utilize are not banned. It seems likely that state law will continue to control for the foreseeable future, and the number of states with partial or complete bans is growing, with several states also enacting income thresholds before a non-compete will be enforceable against an employee. For example, although it was vetoed by Gov. Kathy Hochul, last December, the New York Legislature adopted a complete ban on non-competes. The New York Legislature is expected to consider the issue again, leaving non-competes’ future in New York uncertain.
Second, in many cases, employers may protect their economic interests by entering into and enforcing non-solicitation and/or confidentiality agreements, rather than through no-competition agreements. Those restrictive covenants were not addressed by the FTC and can protect customer relationships, employee relationships, intellectual property, and other important economic interests belonging to such employers. Moreover, such clauses are generally enforceable across the country, usually for a longer period of time than is permitted for non-competes.
If you have any questions relating to non-compete covenants and related issues, please feel free to reach out to your CSG Law attorney or the authors of this alert.