The FTC Rule Banning Noncompetes Has Been Struck Down – For Now

On Aug. 20, a new federal court decision from the Northern District of Texas in Ryan LLC v. Federal Trade Commission halted enactment of the Federal Trade Commission’s (“FTC”) Rule banning noncompete agreements throughout the country.

The FTC previously issued a controversial Final Noncompete Clause Rule in which the FTC essentially banned all employment noncompetes with two narrow exemptions: (i) existing noncompetes with “senior executives” (executives who have the final say on policy decisions that significantly impact the business and who earned at least $151,164 in total annual compensation from their employer in the preceding year) and (ii) noncompetes in the context of the sale of a business. The Rule was to take effect Sept.  4.

Within days of the FTC issuing its Final Rule, lawsuits were filed in federal courts asserting, among other things, that the FTC exceeded its authority in attempting to ban employment noncompetes and that the FTC’s Final Rule was arbitrary and capricious.

A federal court in Pennsylvania ruled that the FTC has the authority to issue a nationwide ban on noncompetes and the ban was not arbitrary or capricious. The judge refused to issue a preliminary injunction to halt enforcement of the FTC’s Rule. While that decision might ultimately be appealed to the Third Circuit, the plaintiff in that case recently filed a motion to stay the case to see if the Ryan decision in Texas is appealed to the Fifth Circuit.

Conversely, a federal court in Texas issued a decision diametrically opposite from the decision by the federal court in Pennsylvania. In doing so, the Texas court ruled the FTC lacks authority to promulgate the Rule and that the Rule is arbitrary and capricious. For further information please refer to our August alert: The FTC’s Noncomplete Ban: Its Status and Potential Strategies

As things stand now, there is a split between federal district courts on the enforceability of the FTC’s ban on noncompetes. There may likely be appeals in both the Texas and Pennsylvania cases, which could easily result in more conflicting rulings. Ultimately, the U.S. Supreme Court may likely decide the fate of the FTC ban on noncompetes, but when is unclear.

As a result of the Texas court’s decision, employers currently do not need to comply with the FTC’s Rule. Further, employers do not need to send notices to employees regarding the legal effect of noncompetes if such notices are not required by applicable state law. However, the FTC has indicated it may likely appeal this new court decision and will take other action to negate or limit the effects of noncompetes.

Although the focus is on the pending court decisions regarding the FTC Rule, it is important for employers to remember that regardless of these pending cases, they must comply with their state’s laws regarding noncompetes. Be mindful that, in light of the chaos created by the FTC Rule and the pending cases, many states may change their laws regarding noncompetes.

The fluctuating legal environment regarding noncompetes is complex and fluid. Clark Hill is monitoring the applicable court cases and appellate progress of each along with each state’s noncompete laws. We also continue to monitor the FTC and the actions it is considering taking to negate or limit the effects of noncompetes. We encourage you to reach out to Clark Hill’s Restrictive Covenant Group, which is ready to provide assistance with this rapidly evolving area of the law. You can also contact Vanessa Kelly, Dan Kinsella, Lisa Eldridge, Lauri Kavulich, David Ovard, or Paul Starkman directly, or another member of the Clark Hill Restrictive Covenant Group for helpful input and information.

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