A federal judge on Tuesday struck down the U.S. Federal Trade Commission rule that would have banned noncompete provisions in most contracts with workers, and required employers to send notices by September 4 informing workers their noncompetes are unenforceable (the Rule). The Texas-based court in Ryan LLC v. FTC granted plaintiffs’ motion for summary judgment finding that the FTC exceeded its statutory authority in promulgating the Rule. The judge further found the Rule to be arbitrary and capricious “because it is unreasonably overbroad without a reasonable explanation.” Specifically, the Rule imposed a “one-size-fits-all” approach with no end date, which did not bear a rational connection to the facts at issue and was based on “inconsistent and flawed empirical evidence, fails to consider the positive benefits of non-compete agreements, and disregards the substantial body of evidence supporting these agreements.”
Unlike the court’s July 3 preliminary injunction that applied only to the named plaintiffs, this decision is the first substantive decision regarding the Rule itself. The court rejected the FTC’s argument that relief should be limited only to the named plaintiffs, so the ruling therefore applies nationwide. The FTC has not yet said whether it plans to appeal the Ryan LLC ruling, but the agency has indicated in the past that it would likely seek appellate review or pursue other options to limit noncompetes. Another case remains pending in the Eastern District of Pennsylvania, but the judge in that matter declined to enjoin the Rule.1
The Rule purported to cover not only employees but also independent contractors, consultants, unpaid employees, externs, interns, apprentices, and employees hired through staffing agencies. It contained a narrow exception for bona fide sale-of-business noncompetes and for existing noncompetes for senior executives but lacked a clear definition as to what constituted a “policy-making position” in order to qualify for the senior executive exception. Additionally, forfeiture provisions and other restrictions that in the FTC’s view would have served as de facto noncompetes would have also been affected by the Rule.
Tuesday’s ruling does not affect state laws governing noncompetes or other restrictive covenants — only the Rule.
1Mem. Op. & Order. at 23-24.
