Federal Court Sets Aside the Federal Trade Commission’s Non-Compete Ban

Federal Court Sets Aside the Federal Trade Commission’s Non-Compete Ban

September 3, 2024.

By: Katya M. Lancero

On April 26, 2024, Sacks Tierney employment law attorney Shar Bahmani published an article regarding the United States Federal Trade Commission’s (“FTC”) final rule issued on April 23, 2024, purporting to ban most employer-worker non-compete agreements nationwide.  In issuing the final rule, the FTC argued that non-compete agreements stifle innovation, suppress wages, and discourage new business formation.  The final rule was intended to go into effect 120 days after publication in the Federal Register – i.e., September 4, 2024.

Also, on April 23, 2024, a Texas employer, Ryan, LLC, filed a lawsuit arguing the final rule should be struck down as unlawful because the FTC acted without statutory authority and the rule was unconstitutional, among other reasons.  On July 3, 2024, the U.S. District Court for the Northern District of Texas (“Federal Court”) issued a preliminary injunction temporarily blocking the final rule for the named plaintiffs.

Last week, on Tuesday, August 20, 2024, days before the final rule was slated to go into effect, the Federal Court agreed with the arguments of Ryan, LLC and the U.S. Chamber of Commerce (who also sought to set aside the FTC’s final rule) asserted in a motion for summary judgment and set aside the final rule, reasoning that the FTC exceeded its statutory authority in implementing the final rule and the rule is arbitrary and capricious because it is unreasonably overbroad without a reasonable justification.  The Federal Court’s decision to set aside the final rule applies to all employers nationwide. 

The FTC will likely appeal the ruling to the U.S. Court of Appeals for the Fifth Circuit, and it may even seek an emergency order from that appellate court to permit the final rule to take effect while the appeal plays out.  Thereafter the legality of the final rule may be appealed to the Supreme Court of the United States (“SCOTUS”).  Notably, courts are no longer required to give substantial deference to government agencies’ actions now that the SCOTUS overturned the Chevron doctrine on June 28, 2024.  As a result, courts have greater discretion in accepting or rejecting a government agency’s interpretation of a law.

For now, employers nationwide may continue to use, offer, and enforce non-compete agreements against employers, subject to any restrictions on non-competes that may be in effect under applicable state law.  Employers may also consider including language in the non-compete clause referencing the invalidity of the clause in the event the FTC ban were to be reinstated.  Sacks Tierney will continue to keep you apprised regarding the status of the final rule.

Importantly, however, pursuant to Arizona law, non-compete clauses must be reasonable in geographic and temporal scope – and they must be narrowly tailored to the employer’s legitimate business interests – to be held enforceable by a court. 

Please email Katya Lancero at katya.lancero@sackstierney.com or Shar Bahmani at shar.bahmani@sackstierney.com if you would like assistance in analyzing, preparing, enforcing, or defending against a non-compete agreement or if you have questions regarding the state of the FTC’s final rule.