On August 20, 2024, a federal district court in Texas struck down the Federal Trade Commission’s (FTC) rule that would have banned non-competes nationwide. Specifically, the US District Court for the Northern District of Texas set aside the FTC’s non-compete rule (Non-Compete Rule) in its ruling in Ryan LLC v. Federal Trade Commission. This means that the Non-Compete Rule will not take effect on September 4, 2024, or any time thereafter, for all employers, nationwide.
Background on the FTC’s Non-Compete Rule
On April 23, 2024, the FTC announced the Non-Compete Rule, and on May 7, 2024, the Non-Compete Rule was published in the Federal Register, which meant that this rule would take effect 120 days later – September 4, 2024. For more information on the Non-Compete Rule, see our article Alert: FTC’s Final Rule on Non-Competes.
On the same day the FTC announced the Non-Compete Rule, Ryan, LLC filed a lawsuit against the FTC, asserting that the Non-Compete Rule was unlawful and should be struck down.
Ryan, LLC v. FTC
In the Ryan case, the court found that the FTC exceeded its statutory authority by trying to enact the Non-Compete Rule. The Administrative Procedure Act (APA) directs courts to review actions carried out by administrators (the FTC in this case), to ensure that such agency actions do not exceed the limitations of the administrators’ statutory authority. In making its determination, if a court finds that an agency action was arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law, then by law, the court is required to hold such agency action unlawful and set it aside.
The court ultimately held that the FTC didn’t have substantive rulemaking power to enact the rule. Additionally, the court also held that the Non-Compete Rule was arbitrary and capricious because it was unreasonably overbroad—prohibiting the entering or enforcing of virtually all non-competes instead of targeting specific, harmful ones—without a reasonable explanation, noting that a handful of studies put forth by the FTC that compared the non-compete laws of different states was inapposite to the broad, nationwide ban. The court further found that the FTC didn’t sufficiently address any alternatives to the Non-Compete Rule.
With these determinations, the court ruled that the Non-Compete Rule was unlawful and blocked the FTC’s enforcement of the rule, nationwide. The FTC argued that the court’s ruling should be applied to only the named plaintiffs in the Ryan case; however, the court denied this argument, stating that the APA did not contemplate party-specific relief.
At this time, the outcome of the Ryan case means that employers will not need to make any of the changes and notices regarding any existing non-competes that were originally required by the Non-Compete Rule. Subject to each state’s laws on non-competes, employers will also be able to continue entering and enforcing non-competes. As a final note, because the FTC may appeal this court’s decision to the Fifth Circuit Court of Appeals, we recommend that you continue to monitor the ongoing developments and lawsuits concerning this Non-Compete Rule.
State-Level Non-Compete Laws
Irrespective of the implications of the Ryan case and the FTC’s Non-Compete Rule, various states have been enacting their own state-specific non-compete laws recently, with some of these laws to take effect starting in 2025.
For example, effective June 2024, Rhode Island made restrictive covenants entered into with advanced practice registered nurses (APRNs) void and unenforceable, including restrictions that prevented APRNs from: (1) practicing in a certain geographic area for a period of time following their employment; (2) providing treatment, advising, consulting with, or establishing a professional relationship with any current patient of the employer; and (3) soliciting or seeking to establish a professional relationship with any current patient of the employer. These APRN prohibitions do not apply to purchase and sales of practices, provided that the periods for the restrictive covenant and non-compete covenant are no longer than 5 years.
A few other states that have similar laws coming into effect in 2025: (1) Louisiana (adding certain restrictions to non-competes with physicians); (2) Pennsylvania (voiding non-competes with certain healthcare practitioners with limited exceptions); and (3) Maryland (introducing additional restrictions for non-competes with certain healthcare professionals based on salary, duration of the restrictive period, and geographical area).
Contact ByrdAdatto for the Latest on Non-Competes
If you have any questions about this latest update on the FTC’s Non-Compete Rule or your states’ non-compete laws, please contact ByrdAdatto.
