On August 20, 2024, United States District Judge, Ada E. Brown of the United States District Court for the Northern District of Texas granted a Motion for Summary Judgement, striking down the FTC’s Non-Compete Rule.
KingSpry’s Employment Law Chair, Avery E. Smith, Esq., reviews the Court’s decision and offers guidance to employers regarding the use of non-competes and other restrictive covenants in employment practices.
Recap
On April 23, 2024, the Federal Trade Commission (“FTC”) published its Non-Compete Rule (the “Rule”), concluding that it is an unfair method of competition for persons to, among other things, enter into non-compete clauses with workers on or after the Rule’s effective date. The Rule was scheduled to take effect on September 4, 2024.
On July 3, 2024, in Ryan, LLC v. FTC, Judge Ada E. Brown granted a preliminary injunction against the Rule for only the Plaintiff and Plaintiff-Intervenors in that case.
In contrast, on July 23, 2024, in ATS Tree Services, LCC v. FTC, U.S. District Judge Kelley Brisbon Hodge for the Eastern District of Pennsylvania upheld the Rule, denying the Plaintiff’s motion for a stay of the effective date and preliminary injunction.
The Decision
Just weeks after her July 3, 2024 decision, Judge Ada E. Brown expanded the scope of the preliminary injunction, striking down the Rule nationwide.
The Court concluded that (1) the FTC promulgated the Rule in excess of its statutory authority and (2) the Rule is arbitrary and capricious. In composing its decision, the Court cited Loper Bright Enterprises, et al., v. Gina Raimondo, Secretary of Commerce, et al. and relevant sections of the Administrative Procedure Act.
As discussed in our previous Employment News, the Supreme Court’s decision in Loper is likely to trigger significant change in administrative law. Judge Ada E. Brown’s decision is only the first of many likely to hold that agencies lack the authority to issue regulations.
Moving Forward
Unless the FTC files a successful appeal, the Rule will not take effect on September 4, 2024 or thereafter. As such, non-compete clauses remain enforceable at the federal level, under most circumstances. State laws, however, may limit the use of restrictive covenants.
Employers are encouraged to keep abreast of the ongoing complexities regarding the use of restrictive covenants, i.e., non-compete clauses. While existing non-compete clauses are legal, in most cases, it may be beneficial for employers to consider the use of alternative restrictive covenants, such as non-disclosure, non-solicitation, and/or confidentiality clauses.
