Non-compete Agreements Will Survive, FTC Rules Won’t (For Now)

Authors: Mark A. Konkel and Alex J. Seidenberg (Kelley Drye)

In 2023 and into 2024, no employment law topic has attracted more attention than the Federal Trade Commission’s (FTC) proposed and final regulations that seek to broadly and controversially ban noncompete clauses between employers and their employees. The final regulations represent a significant shift in the regulation of noncompetes, which have traditionally been governed by state law for more than a century, predating the creation of the FTC. The rule tests the FTC’s legal authority to regulate unfair methods of competition in an unprecedented way.

Not surprisingly, the Final Rule has faced swift legal challenges challenging the FTC’s rulemaking authority and its potential survival in the courts. So far, some of these challenges have been successful, albeit to limited extent. On July 3, 2024, the court in Ryan LLC v. FTC issued a preliminary injunction against the FTC Final Rule, temporarily blocking the noncompete from taking effect against the named plaintiffs/intervenors. Most importantly, the Ryan court set out its reasoning for why the FTC Final Rule is likely unlawful, setting the stage for future legal challenges. However, the court did not issue a nationwide injunction, meaning that the Final Rule is still scheduled to take effect on September 4, 2024, for all parties not involved in the Ryan action. The FTC Final Rule has been severely affected, further complicated by the U.S. Supreme Court’s ruling in Loper Bright Enters. v. Raimondo, which struck down Chevron’s derogation rule. This deference previously allowed federal agencies such as the FTC to rely heavily on their interpretations of applicable law when issuing rules and regulations. Without Chevron, regulating noncompete agreements and other rules will be more challenging for federal agencies because courts are likely to be less deferential to administrative agencies’ interpretations of applicable law.

In its current form, the Final Rule will go into effect on September 4 for all employers except those involved in the Ryan action. That could change if a nationwide injunction is entered in Ryan or other courts. Employers must be prepared to implement significant changes to noncompetes that, if required, will have a profound impact on their employees and businesses for the foreseeable future. In this article, we demystify the Final Rule, discuss its implications, discuss the current legal challenges, and provide practical considerations for employers preparing for its possible September 4 implementation…

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