August 23, 2024

CLIENT ALERT: FTC NON-COMPETE IS NOT TAKING EFFECT ON SEPTEMBER 4, 2024

On August 20, 2024, the United States District Court for the Northern District of Texas set aside the Federal Trade Commission’s (“FTC”) infamous final Rule banning most non-compete agreements (“The Rule”)—which was set to go into effect on September 4, 2024—holding that The Rule shall not be enforced by the FTC nor take effect as to any workers or employers.  

FTC Non-Compete Rule Overview  

On April 23, 2024, the FTC voted 3-2 to approve a final rule banning non-compete agreements with all workers in the United States and invalidating existing non-compete agreements, with limited exception of senior executives, by making them unenforceable. The Rule covers explicitly any written or oral contractual policy or condition of employment that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from:  

1. Seeking or accepting work in the United States with a different person where such work would begin after the conclusion of employment or   
2. Operating a business in the United States after the termination of employment.   

In addition, the Rule provides that “a term or condition of employment” includes written or oral workplace policies that utilize restrictive language, including handbooks and informal contracts, that successfully prevent workers from seeking new employment or starting a business, as well as excessively restrictive language contained in non-disclosure policies/agreements, non-solicitation agreements, and severance agreements.    

Ryan LLC v. FTC August 20, 2024 Order  

Unsurprisingly, the Rule was immediately subjected to legal challenges following the FTC’s approval vote. The first lawsuit challenging the validity of the FTC’s proposed rulemaking authority was filed within hours of the FTC’s announcement in the Northern District Court of Texas in Ryan, LLC v. FTC—specifically, alleging that the global tax services firm would be irreparably harmed by the Rule arguing that the FTC lacked legal authority to create substantive rules regulating unfair methods of competition and, further, that the FTC’s actions constituted an unconstitutional delegation of legislative power.   

On July 3, Honorable Judge Ada Brown of the United States District Court for the Northern District of Texas issued a preliminary injunction enjoining the Rule from going into effect on September 4, 2024—however, only concerning the named Plaintiffs in the Ryan, LLC v. FTC action. The limited scope of the injunction previously had employers nationwide scrambling to prepare with the Rule’s requirements as the impending September deadline encroached.  

A mere 15 days before the Rule’s effective date, Honorable Judge Brown expanded the scope of the injunction nationwide in her August 20 Order granting Plaintiff’s Motion for Summary Judgment in Ryan, LLC, blocking the Rule from taking effect entirely. In sum, the Texas Court’s order held that the FTC’s Rule is “unreasonably overbroad and without reasonable explanation” and that the “FTC exceeded its statutory authority in implementing the Rule, and the Rule is arbitrary and capricious.”  

KK Takeaways  

While the Texas Court’s decision in Ryan, LLC. provides temporary relief to employers, this issue is far from final. The FTC may choose to appeal the Court’s decision or seek an emergency order from the 5th Circuit Court of Appeals that would cause the Rule to take effect as scheduled.   

Further, inconsistent rulings nationwide could result in a circuit split, which would need to be ultimately resolved by the Supreme Court of the United States—for example, on July 23, 2024, a federal court out of the Eastern District of Pennsylvania held the exact opposite of the Ryan, LLC Texas Court, finding that the Rule was valid and enforceable.   

1. Before hiring an employee, determine if they are bound by any restrictive covenants that may prevent them from working for you.  
2. Review your existing contracts with key personnel and ensure they adequately mitigate the risk of losing clients, confidential data, or other valuable information. [Remember, this often requires compliance with state law where the employee is located.]  
3. Review your processes and efforts to protect confidential and/or proprietary information.  

Employers should stay on high alert and consult with employment counsel about the ongoing litigation surrounding the FTC’s Non-compete Rule. 

Personalized Guidance at Your Fingertips 

Kelley Kronenberg’s Labor and Employment Law Division is here to help you navigate these complex waters. Our experienced attorneys can: 

• Analyze your existing agreements; 

• Develop compliant strategies to protect your business interests; and 

• Keep you updated on the latest legal changes and their potential impact. 

Don’t wait for the next court decision. Contact Kelley Kronenberg today to proactively address your non-compete concerns in this uncertain legal environment. Call us at 954-370-9970 or visit us at www.kelleykronenberg.com today.  

Let’s work together to ensure your employment practices are both legally sound and business-savvy.