As we had previously anticipated, yesterday, August 20th, 2024, Judge Ada Brown of the Northern District of Texas issued a broad order invalidating the Federal Trade Commission’s (“FTC”) final rule, which would have banned non-compete agreements for most employees nationwide (the “Final Rule”). Most interestingly, unlike Judge Brown’s prior July 3rd ruling, which only blocked the Final Rule from affecting the parties in the Texas case, her August 20th ruling blocks the Final Rule’s application to employers across the country. Based on this ruling, employers no longer need to worry about their employee non-competes being invalidated across the board, at least for the time being.
The Final Rule would have taken effect on September 4, 2024 (the “Effective Date”). In addition to banning forward looking non-competition restrictions in employment agreements executed on or after the Effective Date, the Final Rule would have also imposed certain obligations on employers in connection with non-compete agreements entered into before the Effective Date. Specifically, employers party to employment agreements with non-compete clauses would have been required to provide notice to each employee or former employee subject to such a restriction informing them that said restrictions are now void and unenforceable. The notice would have had to have been in writing and delivered by postal mail or email. Given that the Final Rule’s implementation has been blocked, for now employers may continue to utilize employment non-competition covenants and no notice to employees is required. However, in a statement following the ruling, FTC’s spokesperson Victoria Graham indicated the agency is “seriously considering a potential appeal,” so we anticipate this will not be the final act of the ongoing legal drama surrounding the Final Rule. As such, employers should continue to monitor the situation and be prepared to take action in the event Judge Brown’s most recent ruling is overturned by a higher court.
In reaching her decision invalidating the final rule, Judge Brown found that: (i) in promulgating the Final Rule, the FTC exceeded its statutory authority; and (ii) the Final Rule failed to meet the Administrative Procedure Act’s “arbitrary-and-capricious standard” which requires agency action be reasonable and reasonably explained. In finding the Final Rule arbitrary and capricious, she noted that:
- “The [Final Rule] is based on inconsistent and flawed empirical evidence, fails to consider the positive benefits of non-compete agreements, and disregards the substantial body of evidence supporting these agreements.”
- “The FTC failed to sufficiently address alternatives to issuing the [Final Rule].” and
- “The FTC’s “compelling justifications” for its decision to not consider other exceptions or alternatives does not adequately justify the [Final Rule].”
Based upon these findings, Judge Brown concluded the proper remedy under the Administrative Procedure Act was to “hold unlawful and set aside” the Final Rule, noting “The [Final Rule] shall not be enforced or otherwise take effect on its effective date of September 4, 2024, or thereafter.”
Frier Levitt’s corporate and employment attorneys are continuing to monitor the status of the Final Rule and will provide updates as soon as they become available. In the meantime, if you have any questions regarding the impact of yesterday’s ruling, or would like to discuss the Final Rule’s potential impact on your business or potential strategies to deal with its implementation in the event yesterday’s ruling is overturned contact Frier Levitt today.
Should the Final Rule become effective, Frier Levitt will also be offering a complimentary webinar to all employers outlining the notice requirements for employers and potential alternative strategies to non-competition covenants.
