As we previously explained HERE, a Texas federal court in Ryan LLC v. FTC issued a preliminary injunction last month that temporarily blocked the Federal Trade Commission (“FTC”) from enforcing its Final Rule banning most non-competition agreements with workers – but only as to the specific plaintiffs in that case. On August 20, 2024, the Ryan court issued its ruling on the merits of the case, ten days in advance of its own deadline. In contrast to the preliminary injunction, the new ruling expressly overturns the FTC action with nationwide effect.
In her opinion, United States District Judge Ada E. Brown reviewed the Final Rule under the framework of the Administrative Procedure Act (“APA”), which, among other things, gives authority to a court to hold unlawful and set aside agency action found to be “in excess of statutory jurisdiction, authority, or limitations” or “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law”. Under reasoning mirroring that supporting her prior grant of preliminary injunctive relief, Judge Brown concluded both that (1) the FTC exceeded its statutory authority in promulgating the Final Rule, and (2) the Final Rule itself is arbitrary and capricious.
Judge Brown found that while Congress did grant the FTC authority to prevent unfair methods of competition, this power is limited to case-by-case administrative adjudication and procedural rulemaking and does not include the authority to make substantive rules (like the Final Rule). Additionally, the court found the Final Rule to be arbitrary and capricious because it is unreasonably overbroad. The court took issue with the Final Rule’s “one-size-fits-all approach with no end date” as well as the FTC’s failure to make a rational connection between the studies it conducted of state policies addressing non-competes in specific factual situations and the “sweeping prohibition” of non-compete provisions imposed under the Final Rule. Further, Judge Brown held that the FTC failed to sufficiently explore less disruptive alternatives to the Final Rule as required to support such broad substantive rulemaking.
Accordingly, the court ordered that the Final Rule may not be enforced or otherwise take effect – on its intended effective date of September 4, 2024, or thereafter. The FTC will almost certainly appeal Judge Brown’s decision to the Fifth Circuit. There are also pending challenges to the FTC’s Final Rule in Pennsylvania and Florida that may make their way to the Third and Eleventh Circuits, respectively. It remains to be seen whether the Final Rule will be upheld by any of these courts or, potentially, the U.S. Supreme Court.
For now at least, employers are not required to abide by the Final Rule’s directive to issue notices to current and former workers with non-competition provisions or to cease entering into non-competition agreements with workers. As previously noted, however, notwithstanding the enforceability of the Final Rule, employers must comply with applicable state or local laws prohibiting or limiting non-competition agreements. Given the complexity of this area of law, we recommend consulting with counsel before entering into non-competition agreements or attempting to enforce existing non-competition agreements with employees.
To read more about the enactment of the Final Rule, see our April 24, 2024 eAlert HERE. If you have questions related to the Final Rule or the enforceability of non-competition agreements in those jurisdictions in which your company does business, please reach out to the NFC Attorney with whom you typically work or call us at 973.665.9100.
