Federal Judge Invalidates FTC Rule Banning Non-Competes

This is an update to our April 25, 2024 alert, Key Takeaways From the FTC’s Final Rule Banning Most Non-Competes.

In what is likely very welcome news to employers throughout the country, earlier this week, a federal judge in the Northern District of Texas issued a final Order in Ryan LLC v. Federal Trade Commission, declaring invalid the Federal Trade Commission’s recent final rule (the “Rule”) that would have rendered most non-compete clauses unenforceable as “unfair methods of competition.” Absent a reversal by an appellate court in the future, the Rule, which garnered significant attention from legal commentators since its announcement in late April, is no more.

Under the now-invalidated Rule, any existing non-compete clause would have been rendered unenforceable, unless the person bound by the clause was a “senior executive” earning above $151,164 in total annual compensation. The Rule, subject to limited exceptions, would also have banned any future non-competes, regardless of the employee’s position or salary.

The plaintiffs in the Texas litigation included the U.S. Chamber of Commerce, which argued that the Rule was “arbitrary and capricious” and exceeded the FTC’s statutory authority. In her final ruling, Judge Ada Brown agreed with the plaintiffs and ordered the Rule set aside under the Administrative Procedure Act. As a result, the FTC cannot enforce the Rule against any employer, anywhere in the country. An earlier, preliminary ruling by Judge Brown had reached similar legal conclusions, but it had only protected the plaintiffs in the litigation. 

Judge Brown’s ruling also means that employers do not need to provide notices to employees that the Rule would have mandated, informing the employees that their non-compete agreements would be unenforceable as of September 4. Employers who have already sent such notices should consider seeking legal advice about the possibility of revoking or rescinding them.

The FTC has announced that it is “seriously considering” an appeal of the district court’s decision, and it has emphasized that the ruling does not affect its ongoing efforts to police non-competes through “case-by-case enforcement actions” under pre-existing statutes and regulations. Judge Brown’s ruling also does not affect the many state laws that regulate or, in some cases, prohibit, the enforceability of non-competes and other restrictive covenants.

If you have any questions about legal challenges to the Rule, or if you have any other questions related to protecting your business interests through a non-compete agreement, please contact one of the authors listed above.