Update on FTC Non-Compete Ban: Rule Remains in Effect Despite Conflicting Court Decisions
The Federal Trade Commission’s (FTC) rule that nearly bans all non-compete agreements has seen some notable developments recently. Here’s where things stand as of now:
Background on the FTC Rule
The FTC proposed a rule on May 7, 2024, which is set to take effect on September 4, 2024, unless stayed by the courts. This rule primarily targets new non-compete agreements but also impacts existing ones under specific conditions. Here’s a quick rundown of the rule’s key points:
- New Non-Competes: The ban applies to all new non-compete clauses signed after the rule takes effect.
- Business Sales Exception: Non-compete agreements tied to the bona fide sale of a business are exempt.
- Senior Executives: Existing non-competes for “Senior Executives” in significant policy-making positions who meet certain income thresholds remain enforceable.
For more details, you can refer to our prior post [here].
Recent Court Rulings: Conflicting Outcomes
Since the rule’s proposal, several lawsuits have been filed challenging its legality. Two recent court decisions have resulted in opposing conclusions about the rule’s enforceability:
- Ryan, LLC v. FTC (July 3, 2024): The U.S. District Court for the Eastern District of Texas issued a preliminary injunction, staying the rule’s effective date for the plaintiffs involved. The court found that the plaintiffs had a strong chance of success with their arguments that (1) the FTC lacks statutory authority to issue this type of substantive rule, and (2) the FTC’s actions were arbitrary and capricious. Importantly, the injunction only applies to those specific plaintiffs, not nationwide.
- ATS Tree Services v. FTC (July 23, 2024): Just weeks later, the U.S. District Court for the Eastern District of Pennsylvania issued a near opposite decision from the Ryan court. The court denied the plaintiff’s request for an injunction, finding that they had not shown a likelihood of success in arguing that the FTC’s rule was unlawful. Essentially, the court found that, unlike Ryan, the FTC had the statutory authority to issue substantive rules like this one regarding unfair methods of competition.
What’s Next?
Despite the Ryan decision, the FTC rule is still scheduled to take effect on September 4, 2024; however, there’s a pending motion in the Ryan case that seeks to vacate the rule on a nationwide basis, with a decision expected by August 30, 2024.
For now, employers should continue to monitor the situation closely and prepare for the possibility that the rule will go into effect. This includes ensuring compliance with the rule’s notice requirements if it proceeds as scheduled.
Stay tuned for more updates as this situation evolves and reach out to Roddy Stieger for additional questions.
