Not Dead Yet: Noncompetes Survive, the FTC Rule Doesn’t (For Now)

By: Mark A. Konkel & Alex J. Seidenberg (Kelley Drye)

In 2023 and into 2024, no employment law topic has garnered more attention than the Federal Trade Commission’s (FTC) Proposed and Final Rule, which seeks to broadly and controversially ban noncompete clauses between employers and their workers. The Final Rule signifies a major shift in the regulation of noncompetes, traditionally governed by state law for over a century, predating the establishment of the FTC. This rule tests the FTC’s legal authority to regulate unfair methods of competition in an unprecedented way.

Unsurprisingly, the Final Rule has faced swift legal challenges, questioning the FTC’s rule-making authority and its potential survival in the courts. Thus far, some of these challenges have succeeded, though in a limited scope. On July 3, 2024, the court in Ryan LLC v. FTC granted a preliminary injunction against the FTC’s Final Rule, temporarily blocking the noncompete ban from taking effect against the named plaintiff/intervenors. Crucially, the court in Ryan outlined its reasoning for why the FTC’s Final Rule is likely unlawful, setting the stage for future legal challenges. However, the court did not issue a nationwide injunction, meaning the Final Rule is still set to take effect on September 4, 2024, for all parties not involved in the Ryan action. The FTC’s Final Rule has taken a significant hit, further complicated by the U.S. Supreme Court’s decision in Loper Bright Enters. v. Raimondo, which overturned the Chevron deference. This deference previously allowed federal agencies like the FTC to rely heavily on their interpretations of existing law when issuing rules and regulations. Without Chevron, it will be more challenging for federal agencies to regulate noncompete agreements and other rules, as courts are likely to be less deferential to administrative agencies’ interpretations of existing law.

As it stands, the Final Rule will take effect on September 4th for all employers, except those involved in the Ryan action. This could change if a nationwide injunction is issued in Ryan or other courts. Employers must be prepared to implement significant changes regarding noncompetes, which, if required, will profoundly impact their workforce and business operations for the foreseeable future. In this article, we demystify the Final Rule, its implications, discuss the current legal challenges, and provide practical considerations for employers as they prepare for its possible implementation on September 4th…

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