Updated: October 22, 2024
Did the FTC Ban Non-Compete Clauses?
The answer is, no... at least not yet.
On August 20, 2024, a federal judge in Texas ruled that the FTC's non-compete ban is unlawful and set aside the rule nationwide.
However, the FTC filed an appeal to challenge that court's decision on October 18. The U.S. Court of Appeals for the Fifth Circuit will hear the case next.
It will likely be many more months before the issue is conclusively resolved. Review the latest developments below, including what employers can do now to protect their business.
What's the Latest on the Legal Challenges to the FTC Ban?
Here is a timeline of the decisions and events leading up to the final FTC rule banning most non-compete agreements and the legal challenges since:
- January 5, 2023 – The Federal Trade Commission (FTC) proposed a rule that would ban non-compete agreements nationwide.
- April 19, 2023 – The proposed rule was open for public commentary through April 19 and received an overwhelming response – close to 30,000 comments. In the following months, the FTC “carefully review[ed] each comment and ma[de] changes to the proposed rule in response to the public’s feedback.”
- April 16, 2024 – FTC Chair Lina Khan announced that a special Open Commission Meeting would be held virtually the following Tuesday to vote on the proposed final rule.
- April 23, 2024 – The FTC voted 3-2 to publish the “Non-Compete Clause Rule” to ban employers from entering into non-compete clauses with workers on or after the effective date. Before the FTC can enforce the rule, it must publish the final version in the Federal Register, which contains all government agencies' rules and regulations.
- April 23, 2024 – Within hours of the FTC vote, global tax services firm Ryan filed a lawsuit (Ryan LLC v. FTC, No. 24-cv-00986-E) in the Northern District of Texas (a U.S. district court) seeking to “prevent the immense, undue burdens the FTC’s rule would impose on service-driven companies of every size nationwide.” The plaintiffs asked the court to set aside the rule and declare that the FTC does not have the authority to issue rules defining acts to be unfair competition.
- April 24, 2024 – One day later, the U.S. Chamber of Commerce filed a similar complaint against the FTC in the Eastern District of Texas (Chamber of Commerce et al. v. FTC, No. 24-cv-00148), requesting an injunction to stop the agency from enforcing the non-compete rule.
- April 25, 2024 – A third lawsuit (ATS Tree Services LLC v. FTC, No. 24-cv-01743) was filed in the Eastern District of Pennsylvania (also a U.S. district court) by ATS Tree Services, LLC, a Pennsylvania company with 12 employees. The plaintiffs in this lawsuit are asking the court to hold the rule unlawful and set it aside
- May 7, 2024 – The FTC published the final rule in the Federal Register. Per the federal rulemaking process, executive branch agencies must publish the final rule in the Federal Register before the rule is enforceable. Unless the courts intervene, the FTC’s non-compete clause rule is set to go into effect 120 days after this date.
- May 9, 2024 – the U.S. Chamber of Commerce joined its lawsuit with Ryan's since both suits sought the same relief, i.e., to set aside the FTC rule banning non-compete agreements.
- May 10, 2024 – The now-united plaintiffs filed a motion on May 10 for a preliminary injunction to stop enforcement of the rule.
- May 29, 2024 – The FTC filed its response, opposing the injunction, on May 29.
- June 21, 2024 – A Florida real estate company, Properties of the Villages, Inc., (POV) filed a third lawsuit challenging the new federal rule. Like other lawsuits against the rule, this one seeks to temporarily block the rule from taking effect. The company argues that the rule oversteps government authority, interferes with state laws, and unfairly impacts existing contracts. POV has requested the Florida court issue a ruling sufficiently in advance of the rule’s effective date to “avoid incurring unrecoverable costs to prepare for and effectuate compliance with the unlawful Rule as well as avoid substantial and irreparable harm to its business.”
- June 28, 2024 – In a 6-3 decision, the Supreme Court overruled a 40-year-old legal doctrine that deferred to federal agencies' interpretation of existing laws. In overturning this doctrine, known as the Chevron deference, the Supreme Court gave courts authority to exercise independent judgment in deciding questions of law arising from the actions of a federal agency, instead of deferring to the agency's interpretation. The Supreme Court emphasized that the only question that matters is: “Does the statute authorize the challenged agency action?” This exposes the FTC rule banning non-compete agreements to greater court scrutiny.
- July 3, 2024 – U.S. District Judge Ada Brown in Dallas, the federal judge assigned to the Ryan LLC v. FTC case, granted a preliminary injunction blocking the FTC from enforcing its ban against the collective plaintiffs pending the final outcome of the lawsuit. In her ruling, Judge Brown wrote that "the FTC lacks substantive rulemaking authority with respect to unfair methods of competition." Judge Brown granted the temporary injunction after finding that "plaintiffs are likely to succeed on the merits" of the case.
- July 23, 2024 – Twenty days later, the federal judge presiding over ATS Tree Services, LLC v. Federal Trade Commission rejected the plaintiff's argument that the FTC lacks authority to ban non-compete agreements. The judge wrote in her opinion that the plaintiff "failed to establish a reasonable likelihood that it will succeed on the merits of its claims that the FTC lacks substantive rulemaking authority under its enabling statute, that the FTC exceeded its authority, and that Congress unconstitutionally delegated legislative power to the FTC."
- July 26, 2024 – The American Hospital Association and the Federation of American Hospitals filed an amicus brief supporting the plaintiff's motion in Ryan LLC v. FTC to set aside the non-compete ban. The brief argued that this was the only way to "ensure that hospital labor markets are not adversely distorted by the [Federal Trade] Commission’s unlawful, arbitrary and capricious final rule."
- August 15, 2024 – The judge for the federal lawsuit in Florida Properties of the Villages, Inc. v. Federal Trade Commission temporarily blocked the FTC from enforcing its new non-compete rule against the plaintiff. However, the judge declined to issue a broader ruling that would prevent the FTC from enforcing the rule nationwide.
- August 20, 2024 – Judge Brown issued a final ruling on Ryan LLC v. FTC a few days before the FTC rule would take effect. In her decision, Judge Brown wrote that the FTC "promulgated the non-compete rule in excess of its statutory authority” and set aside the rule nationwide.
- September 4, 2024 – The final rule to ban non-compete agreements was scheduled to become effective on September 4, 120 days after its publication in the Federal Register. However, legal challenges have prevented the ban from taking effect for now.
- October 4, 2024 -- The plaintiff in ATS Tree Services, LLC v. Federal Trade Commission filed a motion to voluntarily dismiss its lawsuit challenging the non-compete ban after a federal judge denied its motion to pause the proceedings pending the final outcome of the Ryan LLC v. FTC matter.
- October 18, 2024 – The FTC appealed Judge Brown's order setting aside its rule to ban non-compete agreements. The FTC rule will now be reviewed by the Fifth Circuit Court of Appeals. While the case may eventually reach the Supreme Court, many experts predict that the rule will ultimately remain overturned.
Will Non-Compete Agreements Be Banned in 2024?
Judge Ada Brown blocked the FTC from enforcing the ban nationwide on August 20, 2024. The FTC filed a notice of appeal to challenge that decision on October 18, 2024. It could take many more months before the issue is conclusively resolved.
Until then, the governance of non-compete agreements reverts to state law. In Texas, non-compete agreements are enforceable if they meet certain requirements.
What Can Employers Do Now to Prepare?
While these legal challenges and political factors play out, Texas employers may want to consider these actions:
- Revisit existing trade secret protections. There are other legal remedies available to safeguard employers from unfair competition.
- Audit your existing employment agreements to discover which agreements may fall under the senior executive exemption and which will be nullified if the FTC’s final non-compete ban goes into effect.
- Prepare (but do not send) notices to workers whose existing non-compete agreements will no longer be enforceable. The FTC provided model language to help employers comply with the notification requirement. However, do not distribute these notices until a ban goes into effect.
- Continue to pursue claims of non-compete violations.
At Hendershot Cowart, we are following developments on this issue and will continue to share updates as merited.
