The FTC’s Non-Compete Rule has been struck down and will no longer take effect on September 4, 2024.

On August 20, 2024, the United States District Court for the Northern District of Texas, Dallas Division, set aside the Federal Trade Commission’s “Non-Compete Rule” (the “Rule”). The court ruled in favor of the plaintiffs in the case of Ryan LLC v. FTC, finding that the Rule was an unlawful agency action beyond the authority of the FTC and that it could be set aside under the Administrative Procedures Act as “arbitrary and capricious.” 2024 U.S. Dist. LEXIS 148488, *37 (N.D. Tex. Aug. 20, 2024).

If the Rule had taken effect as planned on September 4, 2024, it would have banned most employment-related non-compete provisions with nationwide effect for for-profit businesses. Instead, existing non-compete provisions between employers and employees that would have been retroactively invalidated and rendered unenforceable after September 4 will remain valid and enforceable indefinitely. The ban on entering new non-competes is similarly without effect after this ruling.

Since the Rule has been set aside, courts will revert back to their respective previously applied analyses when determining whether non-compete provisions are enforceable. Courts generally look to see if the agreement contains a time restriction and a geographical restriction. The shorter the time limit and smaller the geographical restriction, generally courts in Pennsylvania are more likely to hold those provisions to be enforceable, to the benefit of the employer.

Provisions that lack any restriction as to time or location, such as excluding a former employee from a field indefinitely, are generally found to not be enforceable in Pennsylvania, to the benefit of the employee, since they put an undue burden on the employee and may prevent them from finding gainful employment elsewhere.

It is likely that the FTC will appeal the Ryan LLC decision to the Court of Appeals for the Fifth Circuit. The FTC’s website states that it is considering appeal, and that it is not prevented “from addressing non-competes through case-by-case enforcement actions.”

Interestingly, the United States District Court for the Eastern District of Pennsylvania reached an opposite conclusion than the Northern District of Texas, denying an injunction against enforcement of the Rule sought by the plaintiffs in ATS Tree Servs., LLC v. FTC. The court held that the plaintiffs in that case were not likely to succeed on claims that the FTC lacked rulemaking authority or had exceeded its authority, or that Congress had unconstitutionally delegated legislative power to the agency. ATS Tree Servs., LLC v. FTC, 2024 U.S. Dist. LEXIS 129398, *56 (E.D. Pa. July 23, 2024). Although unsuccessful in the Eastern District of Pennsylvania, ATS Tree Services, LLC, will now benefit from the effect of the decision against the FTC’s Rule in Ryan LLC.

This summary has been prepared by Tucker Arensberg attorneys Adam Appleberry, Matthew Christoph, and Isaac Zimmerman.