This IP Advisory was originally published on August 16, 2024. At that time a final decision in the case cited below, Ryan LLC v. Federal Trade Commission, was pending.
On August 20, 2024, a US District Judge in Dallas sided with the plaintiffs, holding that the Rule violates the Administrative Procedure Act (APA) and exceeds the agency’s statutory authority. Judge Ada Brown concluded that the FTC’s ban is “arbitrary and capricious” within the meaning of the APA “because it is unreasonably overbroad without a reasonable explanation.”
The decision in Ryan LLC will likely be appealed.
What is the FTC’s new rule banning non-compete agreements?
Set to be in effect starting September 4, 20241, the U.S. Federal Trade Commission’s (“the Commission” or “the FTC”) new rule makes it illegal for employers to use non-competes in employer and worker relationships. Specifically, the Rule prohibits employers from:
(1) Entering or attempting to enter into a non-compete with a worker;
(2) Maintaining a non-compete with a worker; and
(3) Representing to a worker that the worker is subject to a non-compete.
Additionally, the Rule mandates that employers void existing non-competes and promptly notify workers that their non-compete agreement is no longer in effect.
Why does the Commission believe this Rule is necessary?
The Commission argues that non-competes hinder workers’ abilities to change jobs, prevent workers from obtaining higher wages, and deprive workers of better working conditions. As such, the Commission promulgated this Rule in an attempt to alleviate the aforementioned concerns.
In support of the Rule, the Commission projects that the Rule will result in an increase in innovation, with estimates of 17,000 to 29,000 patents filed each year; 8,500 businesses created each year; a decrease in the cost of physician services, ranging from $74 billion to $194 billion; and workers each receiving an additional $524.00 per year within the next decade.
To whom does the Rule apply?
While the Rule will generally apply to the entities that the FTC Act authorizes the Commission to regulate, it does carve out exemptions and permissible uses of non-competes.
(1) Exemptions – The Commission states that the following groups are exempted from the Rule:
a. Banks and persons, partnerships, and corporations that are subject to the Packers and Stockyards Act2.
b. Non-profit organizations, as long as:
i. There is an adequate nexus between an organization’s activities and its alleged public purpose; and
ii. Net proceeds are properly devoted to a recognized public interest.
c. Employers who are excluded from coverage under the FTC Act.
(2) Permissible Uses of Non-Competes – The Rule does permit non-competes if:
a. The non-compete is between a seller and a buyer for a bona fide sale of a business;
b. The cause of action is related to a non-compete that took place before the effective date of the Rule;
c. The employer enforces or attempts to enforce a non-compete on a good-faith basis that the Rule does not apply in the respective circumstance;
d. The non-compete is between franchisors and franchisees; or
e. The non-compete was in place with a senior executive prior to the effective date of the Rule.
(3) Senior Executive Exception:
a. A senior executive, as included under the SEC’s definition of “Executive Officers” is exempt from the Rule, provided that the senior executive’s prior year income exceeds the relevant threshold (currently set at $151,164).
What are the concerns regarding the FTC’s rulemaking authority?
The promulgation of this Rule has led many to claim that the Commission is overreaching. Those who oppose the Rule argue that the regulation of non-competes is not within the scope of the FTC’s power, and as such, the Commission has no rulemaking authority regarding the matter.
In response to these concerns, the Commission counters that Section 5 and Section 6(g) of the FTC Act give it such power. The Commission asserts that non-competes constitute an unfair method of competition and therefore are a violation of Section 5 of the FTC Act. Furthermore, the Commission maintains that consumers face higher prices when markets have fewer new entrants and greater concentration, and as such, consumers are adversely impacted by non-competes.
Has the Rule faced any recent legal challenges?
Ryan LLC3 filed suit against the FTC in the Northern District Court of Texas, seeking a stay of effective date and a preliminary injunction. Ryan LLC claimed (1) the FTC acted without statutory authority; (2) the Rule is the product of an unconstitutional exercise of power; and (3) the FTC’s acts, findings, and conclusions were arbitrary and capricious.
In its findings, the Court agreed with the plaintiffs and stated that the FTC likely does not have authority under Section 6(g) of the FTC Act. Additionally, the Court found that the Rule is unreasonably overbroad without a sufficient explanation . Furthermore, the Court remarked that the plaintiffs are likely to suffer financial injury.
Accordingly, the Court granted the plaintiffs’ preliminary injunction and a stay of effective date. However, the Court emphasized that the plaintiffs’ case does not support nationwide injunctive relief; therefore, relief is provided to only the named plaintiffs in the case. The Court is expected to issue its final ruling on August 30, 20244.
A ruling in Ryan LLC in the plaintiffs’ favor may result in an increase of private entities filing similar cases. Further, the stated effective date of the Rule may be postponed.
What are the penalties?
Though the Commission does not explicitly state what the penalties are for violating the Rule, it is presumed that the Commission will issue complaints; seek penalties, damages, restitution, and injunctive relief; and order rescissions or contract reformations.
Is there a private right of action?
As there is no private right of action under the FTC Act, private citizens cannot bring suit against their employers. However, workers are permitted to request a declaratory judgment to invalidate the non-compete.
What are the FTC’s proposed alternatives to non-competes?
The Commission believes that the following methods should be used as substitutes for non-competes, either separately or in conjunction with each other:
(1) Invention Assignment Agreements and/or Fixed Duration Contracts;
(2) Non-Disclosure Agreements;
(3) Patent Law; and
(4) Trade Secret Law, specifically the Uniform Trade Secrets Act, the Defend Trade Secrets Act (2016), and the Economic Espionage Act (1996).
How can employers and employees be proactive?
Although the fate of the Rule remains uncertain, we recommend that employers review any non-competes currently in use in their company; determine which, if any, of the proposed alternatives work best for their business; and draft notices to be sent to any employees who may be affected, once the Rule goes into effect. See Exhibit below. Additionally, we specifically recommend that employers conduct a comprehensive inventory of employee non-compete agreements and identify any senior executives who are excluded from the Rule.
To the extent that employee agreements contain other employment-related topics, such as confidentiality and intellectual property assignment obligations, employers should consider having employees execute separate agreements directed to those topics.
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Thank you to 2024 Summer Associate, Stefica Milor, for her help in preparing this IP Advisory.
This IP Advisory was prepared by Lando & Anastasi, LLP. The information provided in this Advisory does not, and is not intended to, constitute legal advice; instead, all information, content, and materials are for general informational purposes only. Readers should contact an attorney to obtain legal advice with respect to any particular legal matter.
© 2024 Lando & Anastasi, LLP
1 The effective date of the Rule has been delayed indefinitely.
2The Packers and Stockyards Act (1921) regulates meatpacking, swine contractors, live poultry dealers, market agencies, and livestock dealers.
3Ryan LLC was joined by The Chamber of Commerce of the U.S.A., Business Roundtable, Texas Association of Business, and Longview Chamber of Commerce
4The final ruling in Ryan LLC was issued on August 20, 2024.
Exhibit
A new rule enforced by the Federal Trade Commission makes it unlawful for us to enforce a non-compete clause. As of [DATE EMPLOYER CHOOSES BUT NO LATER THAN EFFECTIVE DATE OF THE FINAL RULE], [EMPLOYER NAME] will not enforce any non-compete clause against you. This means that as of [DATE EMPLOYER CHOOSES BUT NO LATER THAN EFFECTIVE DATE OF THE FINAL RULE]:
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- You may seek or accept a job with any company or any person—even if they compete with [EMPLOYER NAME].
- You may run your own business—even if it competes with [EMPLOYER NAME].
- You may compete with [EMPLOYER NAME] following your employment with [EMPLOYER NAME].
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The FTC’s new rule does not affect any other terms or conditions of your employment. For more information about the rule, visit ftc.gov/noncompetes. Complete and accurate translations of the notice in certain languages other than English, including Spanish, Chinese, Arabic, Vietnamese, Tagalog, and Korean, are available at ftc.gov/noncompetes.
