As we have previously reported, the U.S. Federal Trade Commission (FTC) issued a Final Rule which, on its anticipated effective date of September 4, 2024, will invalidate nearly all preexisting noncompetition agreements and bar employers from entering into such restrictions with workers in the future.
This rule has faced numerous legal challenges across the country. On July 3, 2024, a Texas federal judge issued a preliminary injunction against the rule, suggesting that the plaintiffs would likely succeed in proving that the FTC exceeded its authority. However, this injunction was limited to the specific plaintiffs involved in that case and did not apply nationwide.
Following that decision, the odds seemed to favor that other challenges to the Final Rule would be decided similarly, with other federal judges either enjoining the Final Rule outright or on a limited basis as the Texas judge did. However, a Pennsylvania federal district court judge issued a surprising endorsement of the Final Rule by denying a request for a temporary injunction in a similar lawsuit filed against the FTC.
Contrary to the Texas ruling, on July 23, 2024, Judge Kelley Brisbon Hodge of the Eastern District of Pennsylvania ruled that the plaintiffs had not demonstrated they would suffer irreparable harm without an injunction. Additionally, she reasoned that the FTC acted within its authority under the FTC Act, which empowers the agency to prevent unfair methods of competition, including through prospective rulemaking. Judge Hodge concluded that the FTC Act expressly empowers the FTC “to make rules and regulations for the purpose of carrying out the provisions” of the statute, which include “prevent[ing]…unfair methods of competition.” Since the FTC Act grants the FTC the authority to “prevent” unfair competition, Judge Hodge reasoned that this delegation must necessarily include the authority to make prospective rules intended to effectuate that purpose, such as the Final Rule banning non-compete agreements.
The Final Rule’s effective date of September 4, 2024, is quickly approaching. The Texas court is expected to make a final ruling by August 30, 2024, which isn’t likely to include a nationwide injunction. Meanwhile, appeals of the Pennsylvania and Texas decisions are likely but will take time to play out.
This recent development does not provide clarity to employers as they prepare to comply with the FTC’s Final Rule. As such, employers should continue to:
- Evaluate Risk Tolerance: Consider the possibility of needing to comply with the ban and develop a structured compliance strategy.
- Consider Legal Challenges: Filing their own legal challenges may be prudent.
- Strategize Compliance: Different strategies may be needed for the ban on new non-competes versus the notification requirement for existing agreements. It may be wise to wait before notifying employees until there is more legal clarity.
- Seek Legal Counsel: The future of this FTC Non-Compete Rule is uncertain and confusing, to say the least. Businesses should contact their legal counsel at Felhaber to determine how they should proceed.
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