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FTC Appeals Texas Court’s Decision To Block Nationwide Ban On Non-Competes

Insights FTC Appeals Texas Court’s Decision To Block Nationwide Ban On Non-Competes Christopher J. Kelly · FTC Appeals Texas Court’s Decision To Block Nationwide Ban On Non-Competes Tara Humma · October 23, 2024

On October 18, 2024, the Federal Trade Commission (“FTC”) filed an appeal of a decision from the Northern District of Texas setting aside the FTC’s ban on noncompete provisions.

Previously, on August 20, 2024, the Federal District Court in the Northern District of Texas set aside the FTC’s Non-Compete Rule (“FTC Rule”) nationwide. The case is Ryan LLC v. Federal Trade Commission. The FTC Rule was scheduled to take effect on September 4, 2024 and would have banned almost all noncompete clauses between employers and workers in the United States with limited exceptions.

In Ryan, the plaintiff argued that the FTC Rule exceeded the FTC’s statutory authority and was therefore unconstitutional. The Court agreed and ordered that the rule not be enforced nor permitted to take effect on a nationwide basis. The FTC has appealed that ruling to the Fifth Circuit Court of Appeals.

In addition to the Ryan case, in Properties of the Villages, Inc. v. FTC, the Middle District of Florida also issued a preliminary injunction prohibiting the enforcement of the FTC Rule.  That ruling, however, was limited to block enforcement only against the plaintiffs in that case.  The FTC appealed that decision to the Eleventh Circuit on September 24, 2024.

The lone outlier case upholding the new Rule is, ATS Tree Services, LLC v. FTC, in which the Eastern District of Pennsylvania declined to grant a preliminary injunction finding that plaintiff was not likely to succeed on the merits of its challenge to the FTC Rule. The plaintiff in that case filed a motion seeking a stay of the litigation pending the outcome of the Ryan case which was denied by the Court on October 3, 2024. ATS Tree Services, LLC filed a Notice of Voluntary Dismissal of its case the following day. While that case is now concluded, the FTC will doubtless rely on its reasoning in pursuing appeals of the cases originating in Florida and Texas.

Whatever the Fifth and Eleventh Circuits decide on the currently pending appeals, it seems likely that whether the FTC Rule will survive will be decided by the U.S. Supreme Court.  For now, the nationwide injunction in the Ryan case gives employers some breathing room with regard to the FTC Rule and its requirements as applicable to their restrictive covenant agreements with workers, but companies using non-competes should continue to track these appeals as they proceed.

FTC Noncompete Rule Requirements:

The FTC Rule essentially eliminated non-compete clauses, including de facto noncompete clauses regardless of what they were called, for the majority of workers nationwide. The rule was set to go into effect on September 4, 2024, at which point entering into, enforcing or claiming a worker was subject to a noncompete clause, except for very narrow circumstances, would have been deemed an unfair method of competition and therefore, a violation of Section 5 of the Federal Trade Commission Act.  The rule restricts entering into noncompete clauses with all workers on a moving forward basis, but does allow for noncompete clauses entered into prior to the Effective Date to continue to be enforceable as to senior executives as well as for any employees involved in current litigation.

A noncompete clause is defined in the rule as a clause that prohibits, penalizes or functions to prevent a worker from, after termination of employment, (1) seeking work, (2) accepting work or (3) operating a business.  This would include not only traditional noncompete clauses, but also “de facto” noncompete clauses which, while titled as a non-solicitation, confidentiality, garden leave, or employee benefits agreement or clause nonetheless have the effect of prohibiting employee mobility/competition.

The rule defines employment broadly as performing work for another by a worker.  “Worker” is intentionally defined to be broader than just employees and also includes unpaid persons, contractors, externs, interns, volunteers, apprentices and sole proprietors.

There are limited exclusions for certain situations including within the context of a sale of a business.

The rule also required that companies affirmatively send notice to a worker who is covered by a noncompete invalidated by the rule in order to inform the worker that the noncompete clause will not be, and cannot be, enforced against the worker.

Current Status and Action Items:

The FTC Rule is currently on hold based on the Court ruling in the Ryan case. Employers should keep an eye on that case as well as the Properties of the Villages, Inc. case as the appellate decisions in those cases will determine whether companies need to comply with the FTC Rule at some point in the future.

Employers should still consider reviewing and revising their restrictive covenant agreements given that there remains a patchwork of State law governing restrictive covenants including bans on noncompetes in some states. In addition, prior to the FTC Rule, the FTC had issued cease and desist letters related to noncompetes to companies separate and apart from any enforcement of the FTC Rule. Companies should also continue to assess what steps they will need to take should the FTC Rule eventually become effective.

Please reach out to any one of the below attorneys who are available to assist you with drafting, reviewing, and enforcing restrictive covenant agreements as well as defending against claims of violations of restrictive covenant agreements:

This summary is provided for informational purposes only and is not intended to constitute legal advice nor does it create an attorney-client relationship with Rimon, P.C. or its affiliates.

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