On Aug. 20, 2024, a Texas federal judge issued a nationwide injunction barring the implementation of the Federal Trade Commission (“FTC”) Non-Compete Clause Rule (“Final Rule“), which would have rendered most non-compete clauses unenforceable effective Sept. 4, 2024 (the “Effective Date”).

The FTC’s position in creating the Final Rule was that non-compete clauses were an unfair method of competition under Sections 5 and 6(g) of the Federal Trade Commission Act (“FTCA“). However, without the possibility of including a non-compete clause in an employment contract, employers nationwide faced struggles on how to prevent unfair competition, protect employers’ investment in their employees, and protect against the misappropriation of confidential and proprietary information.

We have reported on the Final Rule several times since April 2024 when it was first issued. From the time it was issued, the Final Rule has been subject to various legal challenges. Specifically, in Ryan v. FTC [1], Judge Ada Brown in the U.S. District Court for the Northern District of Texas (the “Texas Court“) issued a preliminary injunction, enjoining the implementation and enforcement of the Final Rule, but only as to the parties before the Court, leaving open the possibility of the Final Rule being enforced nationwide as of the Effective Date.

Weeks later, a Pennsylvania federal court issued an opposing decision, finding that the Final Rule was within the FTC’s authority and refusing to issue any injunction against it [2]. Later, a Florida federal court, similar to the Texas Court, issued a preliminary injunction as to the parties before the court. As can be seen, the inconsistent determinations across the country left great uncertainty as to whether employers needed to take action pursuant to the Final Rule. That is, given that the Effective Date was just a couple of weeks away, employers faced the dilemma of whether they should adhere to the notice and other obligations set forth in the Final Rule and/or amend their new and/or current employment contracts to remove non-competition clauses.

Finally, employers have a definitive answer to this dilemma. The Texas Court ruled on Aug. 20, 2024, that the Final Rule is enjoined nationwide to all parties. The Court ruled that the FTC exceeded its statutory authority when it adopted the Final Rule and found that the Final Rule was arbitrary and capricious.

While the Court recognized that the FTC has some rule-making authority to prohibit unfair methods of competition under Section 6(g) of the FTCA, the Court found that this rule-making authority did not extend to the creation of substantive rules as opposed to “housekeeping” rules. Importantly and highlighting the lack of substantive rule-making power, the Court found that the FTCA did not include a statutory penalty for violating rules promulgated by the FTC.

The Court further found that the FTC’s agency action was arbitrary and capricious because it was “unreasonably overbroad without a reasonable explanation [imposing] a one-size-fits-all approach with no end date, which fails to establish a rational connection between the facts found and the choice made.” The Court noted that the Final Rule is based on inconsistent and flawed empirical evidence, fails to consider the positive benefits of non-compete agreements, and disregards a substantial body of evidence in support of these agreements. Additionally, the Court found that the Final Rule failed to sufficiently address alternatives to a sweeping ban on non-competes, nor did the FTC provide a sufficient explanation on why it chose to adopt a blanket rule as opposed to conducting a case-by-case adjudication. The FTC’s simple reasoning of inconvenience was not nearly enough, in the Court’s view, to match the compelling justification necessary to dismiss possible alternatives.

Accordingly, because of the lack of statutory authority of the FTC and the arbitrariness of the Final Rule, the Court concluded the Final Rule was an unlawful agency action and set aside the agency action in its entirety as permitted under the Administrative Procedures Act. Though the FTC suggested it would appeal the decision, for everyone’s purposes, the Final Rule has been overturned and will not go into effect on Sept. 4, 2024.

That being said, it is imperative to note that the invalidation of the Final Rule does not impact individual state laws. Each employer and employee alike should remain aware of state-imposed restrictions on non-competes. For example, Pennsylvania’s restriction on non-compete clauses as it relates to physicians, certified registered nurse anesthetists, certified registered nurse practitioners, and physician assistants is still set to go into effect on Jan. 1, 2025.

Also, this decision does not prevent the FTC from taking case-by-case enforcement actions as to non-competes.

If you have any questions or for further assistance regarding non-competes, compliance, or other health law matters, please feel free to contact Bill Kalogredis, Esq. or Sonal Parekh, Esq. Learn more at Lamb McErlane PC. One of the most sophisticated, diverse, and respected boutique practices in the Philadelphia area, Lamb McErlane has delivered competent, dedicated, and results-oriented legal services since its founding in 1971.

________________

[1] See Ryan v. FTC, USDC ND Tex. No. 3:24-cv-00986.

[2] See ATS Tree Services, LLC v. Federal Trade Commission, USDC ED Penn. No. 2:24-cv-01743.

*This alert is for educational purposes only and is not intended to be legal advice. Should you require legal advice on this topic, any health care matter, or have any questions or concerns, please contact Vasilios J. (Bill) Kalogredis, Esq. or Sonal Parekh, Esq. Read the alert here.

________________

Vasilios J. (Bill) Kalogredis, Esq. has been advising physicians, dentists, and other healthcare professionals and their businesses as to contractual, regulatory, and transactional matters for 50 years. He is Chairman of Lamb McErlane PC’s Health Law Department. Bill can be reached by email at bkalogredis@lambmcerlane.com or by phone at 610-701-4402.

Sonal Parekh, Esq., is an associate at Lamb McErlane PC who focuses on healthcare transactional matters and a broad range of healthcare regulatory-related issues on behalf of healthcare systems, physicians, dentists, and other healthcare providers, and is a pharmacist by education and training. Sonal can be reached by email at sparekh@lambmcerlane.com or by phone at 610-701-4416.