On August 20, 2024, U.S. District Judge Ada Brown in Texas issued a final order in the pending case, Ryan v. FTC, holding that the Federal Trade Commission (FTC) exceeded its authority in issuing a ban on noncompete clauses. This ruling effectively halts nationwide the implementation of the FTC’s controversial new rule (the “Rule”) that prohibited the use of most noncompete agreements in the employment setting.
In April 2024 the FTC issued its Rule banning virtually all noncompete agreements in the employment setting, scheduled to become effective on September 4, 2024. The Rule would have required employers to send notices to current and former employees (and contractors) that the employer would no longer enforce any noncompetes after their employment. This ban applied not just to a typical noncompetition covenant, but also to other restrictions that could have the effect of restricting post-employment competition. The Rule also would have required employers to stop including any noncompete or other types of provisions in any of their employment related documents and agreements that would have the effect of restricting post-employment competition.
Since the FTC published this new Rule, there have been three significant challenges in different Federal courts. While results have been mixed, this latest court ruling officially stops the new FTC Rule from taking effect nationwide next month.
For now, businesses that utilize noncompete agreements and similar restrictions can continue to do so without the immediate threat of a federal ban. They still must comply with applicable state laws. However, the federal controversy is far from over. A spokesperson for the FTC has stated that it is “seriously considering an appeal,” and asserted that the decision does not block the FTC’s ability to “address[] noncompetes through case-by-case enforcement actions.” As the FTC considers its next steps, the future of noncompete agreements—and the broader question of worker rights—remains uncertain. Accordingly, while immediate compliance with the Rule is unnecessary, employers should continue to monitor developments in this area, and to think strategically about their use of noncompete provisions and alternative options going forward.
Congress could also step into the arena. The court’s ruling emphasized that while there may be merit to the arguments against noncompete agreements, it is ultimately up to the legislative branch to address these concerns through statutory reform. In addition, the General Counsel for the National Labor Relations Board (NLRB) has asserted that noncompete agreements violate the National Labor Relations Act, a position adopted recently by an NLRB administrative law judge in June. The full NLRB has not yet ratified that decision, although that process could be delayed by recent constitutional challenges to the structure of the NLRB. It is important to note that over the past several years various states have enacted statutes reforming noncompete law at the local level. A bill was introduced in the Florida legislature just last year, but did not pass. There have also been efforts at a federal statutory reform for the past few years, but nothing has been enacted so far.
