On April 23, 2024, the Federal Trade Commission voted 3-2 to issue a final rule which effectively banned employers from entering into or enforcing non-compete agreements with employees, with a narrow exception for existing non-compete agreements with policymaking executives earning over $151,164 per year. 16 C.F.R. § 910.2. By its terms, the new rule was to become effective September 4, 2024.
As expected, however, the FTC rule was challenged in multiple court cases filed even before the rule became effective. The gist of the challenges is that the FTC did not have the authority to issue such a rule and that such authority lies with Congress.
In ATS Tree Services, LLC v. FTC, 2024 WL 3511630 (E.D. Pa. July 23, 2024), a federal district court in Pennsylvania, while ruling on a request for a preliminary injunction, held that the FTC did have the authority to issue the rule and that such authority was not an unconstitutional delegation of legislative authority.
However, the court in Ryan v. FTC, 2024 WL 3879954 (N.D. Tex. August 20, 2024), issued a contrary ruling, holding that the rule was arbitrary and capricious and beyond the FTC’s statutory and constitutional authority. Further, the Texas court issued a final judgment setting aside the rule and enjoining its enforcement.
In addition, a federal district court in Florida issued a preliminary injunction against enforcement of the FTC rule against the particular employer involved there (as opposed to a nationwide injunction) Properties of the Villages, Inc. v. FTC, 2024 WL 3870380 (M.D. Fla, August 15, 2024). The Florida court reasoned that the plaintiff employer had a substantial likelihood of prevailing in striking down the rule under the “major questions doctrine.” That doctrine requires that the authority to make rules having extraordinary economic and political significance must be clearly and unambiguously conferred by Congress.
On October 3, 2024, the Pennsylvania district court refused to stay proceedings in the ATS Tree Services case pending the final resolution of Ryan after appeal. ATS Tree Services, LLC v. FTC 2024 WL 4525514 (E.D. Pa. October 3, 2024). The following day, ATS Tree Services voluntarily dismissed that case.
As of now, the Florida ruling in Properties of the Villages, Inc. and the Texas ruling in Ryan have been appealed to the United States Courts of Appeal for the Eleventh and Fifth Circuits, respectively.
Additional challenges to the FTC rule may well occur. Given the general importance of the issue and the split of authority on the issue, the legality of the FTC rule may remain in dispute for some time.
In the meantime, non-compete agreements will continue to be subject to varying state laws and both employers and employees should seek experienced counsel when entering into or acting under such agreements.