Many employers have used noncompete agreements to prevent departing employees from taking valuable information and key customers with them to competitors after they leave. Earlier this year, the U.S. Federal Trade Commission (FTC) appeared to have initiated the demise of noncompetes when it announced a final rule that would widely ban their use.

When issued, the rule had an expected effective date of September 4, 2024. However, a recent ruling in a U.S. District Court in Texas has put the final rule in legal limbo.

Agency’s Rationale

The final rule would require employers to notify affected employees that existing noncompetes would no longer be enforced as of the rule’s effective date. Also at that time, employers would be prohibited from entering into new noncompetes. The rule includes an exception for existing noncompetes applicable to “senior executives.” It defines these as employees who earn more than $151,164 a year and are in “policy-making positions.”

The FTC’s rationale for creating the rule is that too many U.S. workers have become subject to noncompetes. In fact, the agency contends that the agreements violate Section 5 of the FTC Act, an almost 110-year-old law that regulates unfair competitive methods. In the agency’s view, their predominance is unfairly suppressing wages, hindering innovation, and making it more difficult for people to earn a living.

Upon announcing the rule in April, the FTC stated that its research showed 18% of U.S. workers are currently covered by noncompetes. That amounts to nearly one in five workers — or 30 million people. The agency believes that prohibiting the agreements would cause workers’ earnings to rise and more start-up organizations to launch. It also asserts there would be a substantial rise in patents issued over the next decade.

Legal Decision

Suffice to say, virtually no one expected the FTC’s final rule on noncompetes to breeze through to widespread compliance after issuance.

Sure enough, on the very day the final rule was announced, a Texas-based tax services and software firm, Ryan LLC, filed suit challenging the rule in the U.S. District Court for the Northern District of Texas. The U.S. Chamber of Commerce and other industry groups then joined the suit on the firm’s side as “plaintiff-intervenors.” Judge Ada Brown first issued a decision in the case, Ryan LLC v. Federal Trade Commission, on July 3, 2024, preliminarily enjoining (striking down) the noncompete ban but only with respect to the case’s plaintiff and plaintiff-intervenors.

However, in a final judgment issued on August 20, 2024, the same judge ruled that, in issuing the final rule, the FTC had exceeded its statutory authority to ban practices related to unfair methods of competition. In her decision, she wrote that the agency “lacks the authority to create substantive rules” and the final rule itself is “unreasonably overbroad without a reasonable explanation.”

Ultimately, the judge’s ruling means the FTC can’t enforce the ban unless it files an appeal and prevails. To that end, FTC spokesperson Victoria Graham said in a statement, “We are seriously considering a potential appeal.” If the agency does opt to file one, it would be decided by the U.S. Court of Appeals for the Fifth Circuit. From there, the case could wind up before the U.S. Supreme Court, which many experts believe would likely benefit opponents of the rule.

Protect Your Valuables

If your organization uses noncompetes, you’re no doubt aware that the final rule’s original September 4 effective date has come and gone, and the rule’s fate remains uncertain.

Work with your attorney to monitor the Ryan case as well as other ongoing legal challenges. Also, explore how to best protect your intellectual property, customer lists, and other valuable information. Although the final rule is in limbo, noncompetes can still be challenged in court by private parties, and even the FTC itself, on a case-by-case basis. Contact us for help measuring, tracking, and analyzing your employment costs.

Ryan LLC v. Federal Trade Commission, No. 3:24-CV-00986-E, August 20, 2024 (U.S. Dist. Court for the Northern Dist. of Texas)