"The FTC Non-Compete Rule is in Serious Jeopardy," Texas Lawyer

Kellen Scott Discusses Federal Trade Commission’s Non-Compete Clause Rule in Texas Lawyer Article

In a recent Texas Lawyer article, Kellen Scott, shareholder in Chamberlain Hrdlicka’s Labor & Employment practice, discusses the Federal Trade Commission’s (FTC) Non-Compete Clause Rule (the “Rule”), anticipated legal challenges and why employers should pay close attention to ongoing legal developments.

In early 2024, the FTC issued its final Rule outlawing most non-compete clauses, scheduled to take effect on September 4, 2024. The FTC has determined that non-compete clauses with nearly all workers are exploitative and coercive and, therefore, amount to unfair methods of competition. While the FTC did not find non-compete clauses with senior executives to be exploitative and coercive, the FTC nevertheless found that they are unfair methods of competition because non-competes are restrictive, exclusionary, and tend to negatively affect competition conditions.

On the very same day the FTC issued its final Rule, tax services and software provider, Ryan LLC, filed suit in the Northern District of Texas to challenge the FTC’s authority to issue the Rule. The next day, the Chamber of Commerce of the United States of America, Business Roundtable, Texas Association of Business, and the Longview Chamber of Commerce filed a similar challenge to the Rule in the Eastern District of Texas. The day after that, a tree service company filed a similar challenge in Pennsylvania.

However, United States District Judge Ada Brown from the Northern District of Texas granted certain challengers’ motions to stay the effective date of the Rule and entered a preliminary injunction that prohibits the FTC from implementing and enforcing the Rule until the court can resolve the ultimate merits of the challengers’ claims.

In the Ryan case, Judge Brown found the FTC exceeded its statutory authority by promulgating the Rule, and the challengers are likely to succeed on the merits of their claim. Further, Judge Brown determined the challengers also are likely to succeed on the merits on their claim that the FTC’s rulemaking process was arbitrary and capricious. The Administrative Procedures Act requires agency action to be reasonable and reasonably explained. In siding with the challengers, Judge Brown found the Rule to be unreasonably overbroad without a reasonable explanation.

“When the FTC made its final tweaks to the Rule between its proposed rule in 2023 and the final rule published in 2024, the FTC accelerated the deadline by which employers must provide the notice required by the Rule,” said Scott. “The proposed rule had given employers forty-five days after the Rule’s compliance date to provide notice, but the final rule requires notice to be given no later than the Rule’s effective date. This means employers should pay close attention to these ongoing legal developments because, barring a nationwide injunction, employers may have a very short period of time to provide the notice required under the Rule.”

To read the full article, subscribers may click here.