Client Alert: N.D. of Texas Blocks FTC’s Non-Compete Rule, and Non-Competes Survive — for Now — at the Federal Level

August 22, 2024

The N.D. of Texas’ Ruling

On August 20, 2024, the Northern District of Texas struck down the FTC’s final Non-Compete Rule (“the Rule”). The Rule, which would have banned non-competes for most U.S. employees, was supposed to go into effect on September 4, 2024. Further, it would have required that employers send out notices by September 4 to most employees with non-competes, informing them that their non-competes were unenforceable. But in Ryan, LLC v. FTC, the N.D. of Texas found in favor of Ryan, LLC (a tax service firm) and a group of intervenors who collectively sought to challenge the Rule, by first granting preliminary injunctive relief to the plaintiff and intervenors on July 3, 2024, and then extending that relief on August 20 when it held that the Rule was unlawful on a nationwide basis. Specifically, the Court held that: (i) the FTC exceeded its statutory authority in implementing the Rule (finding that the FTC does not possess substantive rulemaking authority with respect to unfair methods of competition); and (ii) the Rule is arbitrary and capricious.

Two other courts have weighed in on similar claims brought by plaintiffs seeking to halt enforcement of the Rule. On August 14, 2024, in Properties of the Villages Inc. v. FTC, the Middle District of Florida preliminarily enjoined the Rule as to the named plaintiff in that case only; a ruling on the merits should follow in the coming months. In ATS Tree Services LLC v. FTC, the Eastern District of Pennsylvania declined to grant the plaintiff’s request for a preliminary injunction of the Rule, holding on July 23, 2024 that at least as of that initial stage, it was not clear the FTC had exceeded its administrative power. The Pennsylvania court has indicated it will rule on the merits by November 27, 2024.

The FTC announced that the agency was seriously considering an appeal of the Texas court’s ruling to the Fifth Circuit Court of Appeals. The possibility of appeals in Florida to the Eleventh Circuit and in Pennsylvania to the Third Circuit is likely, as is an ultimate appeal to the Supreme Court of the United States.

Next Steps for Employers

For now, employers can leave otherwise-enforceable existing non-compete agreements in place; further, there is no need to send out notices regarding the effect of the Rule by September 4, 2024. It remains to be seen how the issue will play out at the appellate level.

Employers should consider revisiting their restrictive covenants and think critically about whether non-competes are the best tool to protect their business interests. Many legislators and courts are growing increasingly skeptical, or even hostile, to non-competes in the employment context,[1] and so employers should consider the following issues:

  • State Legislation: States continue to limit employers’ ability to use non-competes, and, courts often apply the law of the state where the employee resides or physically performs work. This is especially important for remote workers.
    • For example, California, Minnesota, North Dakota, and Oklahoma all ban non-competes.
    • Other states significantly restrict employers’ ability to require non-competes. For example, in Illinois, non-competes entered into after January 1, 2022 will only be enforceable if an employee earns more than $75,000 per year (adjusted for inflation), and has worked for more than 2 years after signing the non-compete or received other adequate consideration that will make the non-compete enforceable faster.
    • Eight other jurisdictions (Colorado, Maryland, New Hampshire, Oregon, Rhode Island, Virginia, Washington, and the District of Columbia) all have similar income thresholds for enforceability. And in Massachusetts, Nevada, and Rhode Island, non-competes are illegal for non-exempt employees.
  • The National Labor Relations Board: According to the NLRB General Counsel’s May 30, 2023, Memorandum, non-competes violate the National Labor Relations Act to the extent they prevent employees from exercising their Section 7 rights (including the right to unionize and engage in other concerted activities). While this opinion may only be relevant to non-managerial employees in matters brought in front of the NLRB, and while only limited relief is available, it is another indicator of a broader climate that is hostile to non-competes.
  • Alternatives to non-competes: Given an increased push to ban or at least severely limit non-competes at the state and federal levels, employers may want to consider more enforceable restrictions designed to protect their business interests:
    • Narrowly tailored non-solicitation and non-interference provisions, including those that concern only customers and confidential information the former employee had contact with, may sufficiently protect business interests. In contrast, provisions that unnecessarily keep employees out of work (without commensurate pay) will continue to face scrutiny in many jurisdictions.
    • Non-disclosure provisions can be sufficient for many lower-level employees.
    • Another option is a true garden leave provision, where the worker is still technically employed (though not actively working) and receiving the same total annual compensation and benefits during the restricted period. Even under the Rule, the FTC stated that it did not consider such a provision to be a non-compete.

Please contact a member of the CFDB team for any inquiries relating to this matter.

Erin McAdams Franzblau – Croke Fairchild Duarte & Beres

Brian Gold – Croke Fairchild Duarte & Beres

Heidi Steiner – Croke Fairchild Duarte & Beres

Tracey Wolfe – Croke Fairchild Duarte & Beres

[1] Generally, non-competes in the context of a sale of a business will continue to be upheld across jurisdictions.