Key Points
- The Northern District of Texas decision prevented the FTC’s final rule banning noncompetes from taking effect on September 4, 2024, as planned.
- Employers should expect the decision to be appealed to the Fifth Circuit and should be aware of similar challenges in other circuits.
- For now, noncompetes may be treated the same as they were before the final rule was issued. However, employers should remain mindful of state laws and the potential for FTC case-by-case enforcement actions.
In Ryan LLC v. Federal Trade Commission, the Federal Trade Commission’s (FTC’s) final noncompete rule was held to be “unlawful and set aside” by Judge Ada Brown of the U.S. District Court for the Northern District of Texas.
The final rule would have banned virtually all noncompete clauses between employers and workers in the United States. The August 20, 2024, ruling followed other decisions with different outcomes in the U.S. District Courts for the Middle District of Florida and Eastern District of Pennsylvania:
- On August 14, 2024, less than a week before the decision in Ryan, the Middle District of Florida entered a limited injunction prohibiting the enforcement of the noncompete rule against the plaintiffs in Properties of the Villages, Inc. v. Federal Trade Commission “until further order of the Court.” Unlike the ruling in Ryan, relief was not granted nationwide.
- In contrast, the Eastern District of Pennsylvania in ATS Tree Services, LLC v. Federal Trade Commission declined to grant a preliminary injunction barring enforcement of the noncompete rule against the plaintiff in that case. The ATS Tree Services court found that the plaintiff had failed to establish either irreparable harm or a reasonable chance of winning on the merits.
Skadden discussed the Ryan decision in detail when it was issued. (See our August 24, 2024, client alert “FTC Noncompete Rule Is Set Aside, but Appeal Is Expected and States May Act.”) While the legal challenges will likely continue as appeals are taken in the US. Courts of Appeals for the Third, Fifth and Eleventh Circuits, employers nationwide may be wondering how the Northern District of Texas decision will impact the noncompete rule.
In this article, we consider some of the practical questions relating to the set-aside of the final rule.
1. Does the Ryan decision benefit employers outside of Texas?
Yes. Judge Brown’s decision in Ryan, unlike the preliminary injunction in Properties of the Villages, has nationwide effect. The noncompete rule was challenged as exceeding the FTC’s statutory authority, as unconstitutional, and as arbitrary and capricious. The district court agreed with the plaintiffs and ordered that the rule “not be enforced or otherwise take effect.”
2. What are the next steps in the Ryan case?
The FTC is likely to appeal the decision to the Fifth Circuit. The agency potentially has much at stake, given that the Ryan court found that the FTC lacked substantive rulemaking authority to define what constitutes “unfair competition” under Section 5 of the FTC Act. Under Chair Lina Khan, the FTC has been focused on expanding the use of Section 5 to reach conduct that is not covered by other competition laws.
If the Fifth Circuit sustains the Ryan court’s order setting aside the noncompete rule, and ATS Tree Services and Properties of the Villages are ultimately appealed to the Third and Eleventh Circuits, respectively, a conflict between the circuits may arise.
In the meantime, the FTC has said that the Ryan decision does not prevent it from addressing noncompetes through case-by-case enforcement actions under Section 5 of the FTC Act or other competition rules. Indeed, the FTC announced several enforcement actions and consent decrees related to noncompetes on the same day it released the proposed noncompete rule in 2023.
3. Did the FTC have authority to issue the rule in the first place?
The FTC’s authority remains in dispute, and this will likely continue through appeals. The plaintiffs in Ryan, Properties of the Villages and ATS Tree Services argued that the rule exceeds the FTC’s statutory authority, violates constitutional and federal administrative law, interferes with the domain of state legislatures and ignores potential pro-competitive benefits of noncompetes.
The court in Ryan agreed that the rule was arbitrary and capricious, ignored more narrow alternatives and was beyond the FTC’s statutory authority under Section 6(g) of the FTC Act.
The court in Properties of the Villages was similarly sympathetic to the plaintiff’s arguments when granting a preliminary injunction. Meanwhile, the court in ATS Tree Services disagreed with the plaintiff’s arguments and expressed doubt about the plaintiff’s ability to establish a reasonable chance of success on the merits.
4. What if an employer already gave notice as contemplated by the noncompete rule?
The final noncompete rule required employers to notify current and former employees with noncompetes that those agreements would no longer be enforceable. Some employers may have already given that notice to employees or former employees.
Employers that sent out a notice before the Ryan decision may consider whether they have a basis to send a new notice communicating that the noncompete rule — which had been slated to become effective on September 4, 2024 — has been set aside by a federal court and that as such, the previous notice is revoked and noncompetes will continue to be enforced by the employer.
5. Are noncompetes now enforceable as written?
Not necessarily. There is a patchwork of laws around noncompetes that vary by state. Noncompetes continue to be held to the same standards that applied before the final rule was published.
The same state rules also continue to apply to noncompetes, such as rules that find noncompetes overbroad or unenforceable due to salary thresholds. These state rules also include noncompete bans in California, Minnesota, North Dakota and Oklahoma.
In addition, as mentioned above, the federal antitrust agencies can still challenge noncompetes under the federal competition laws if they could be found to be unreasonable restraints of trade or unfair methods of competition based on the facts of the specific case.
6. What’s happening at the state level? Are any states trying to limit noncompetes?
With the FTC noncompete rule set aside at least for the time being, we expect the nationwide trend toward limiting noncompetes at the state level to continue.
Rhode Island and Maine each passed noncompete bills in both chambers in 2024, but the governors in each state vetoed the respective bills. After a New York noncompete bill was passed by both chambers in 2023, Gov. Kathy Hochul vetoed the bill as too broad.
In Washington state, a bill that expanded the state’s existing noncompete law took effect on July 6, 2024. SB 5935 includes worker-friendly amendments related to expanding the definition of noncompetes, minimum compensation, duration requirements, disclosure or consideration requirements, and garden-leave-type payments.
In other states, courts are taking more aggressive positions with respect to efforts to enforce noncompete clauses.
In Sum
The Ryan decision gives employers room to breathe, as they no longer face an imminent and categorical ban on noncompetes at the national level. Additionally, although the Ryan court did not rely on the U.S. Supreme Court’s decision in Loper Bright Enterprises v. Raimondo — which overruled Chevron deference to administrative agencies’ interpretations of the laws they are charged with enforcing, reigning in agency power — the high court’s ruling further supports the Ryan court’s decision. (See “Supreme Court Decisions Curtail Regulatory Agencies’ Powers, Making It Easier To Challenge Rules.”)
However, employers should remain mindful of existing and potential new state laws regarding noncompetes and of the impending appeals to the circuit courts. We will be following these situations closely.
This memorandum is provided by Skadden, Arps, Slate, Meagher & Flom LLP and its affiliates for educational and informational purposes only and is not intended and should not be construed as legal advice. This memorandum is considered advertising under applicable state laws.