In January 2023, the Federal Trade Commission (FTC) proposed a sweeping rule that would effectively ban the use of non-compete agreements across the United States, subject to a few very limited exceptions. Non-compete clauses, which prevent employees from working for competitors or starting similar businesses within a certain timeframe after leaving a company, have been widely criticized for stifling competition, limiting worker mobility, and suppressing wages. Additionally, there is an extensive amount of litigation over noncompetition agreements.
The FTC, under the leadership of Chair Lina Khan, argued that these agreements are inherently anti-competitive and harm the economy by reducing innovation and entrepreneurship. The proposed rule was part of a broader agenda by the Biden administration to bolster workers’ rights and increase market competition. According to the FTC’s estimates, the ban could increase wages by nearly $300 billion annually by freeing approximately 30 million American workers from non-compete clauses.
After public commentary, on April 23, 2024, the FTC issued its final rule banning noncompetition agreements. The rule was scheduled to take effect September 4, 2024.
Initial Lawsuits Challenging the Ban
The rule was immediately challenged in federal court. Specifically, there were three major lawsuits challenging the ban.
- Ryan, LLC and U.S. Chamber of Commerce v. Federal Trade Commission in the United States District Court Northern District of Texas – This was a consolidated case. Ryan and the Chamber each filed separate lawsuits at the same time and the cases were consolidated.
- Properties of the Villages, Inc. v. Federal Trade Commission in the United States District Court Middle District of Florida.
- ATS Tree Services, LLC v. Federal Trade Commission in the United States District Court Eastern District of Pennsylvania.
In each case, the plaintiffs sought a nationwide preliminary injunction stopping implementation of the rule for the entire country. In Ryan and Villages, preliminary injunctions were issued halting enforcement of the rule as it pertains to the specific plaintiffs in those cases only.
In Tree Services, the preliminary injunction was denied.
Initially, it appeared as though the rule might survive and take effect September 4.
Judge Brown Blocks the Rule
However, on August 20, 2024, Texas Federal Judge Ada Brown, the federal judge overseeing the Ryan Case, permanently blocked the rule, concluding that it’s beyond the FTC’s authority. Here is how she reached her conclusion:
The FTC Exceeded Its Authority
Judge Brown found that the FTC improperly exceeded its statutory authority by creating a new rule banning non-competes based on the FTC Act’s “housekeeping rules” that lack statutory penalties, as opposed to the statute’s “substantive rulemaking power” provisions.
“In sum, the Court concludes that the FTC lacks statutory authority to promulgate the Non-Compete Rule, and that the Rule is arbitrary and capricious. Thus, the FTC’s promulgation of the Rule is an unlawful agency action,” Judge Brown said.
Judge Brown acknowledged that Congress vested the commission with the power to prevent unfair methods of competition, but she concluded that the “plain reading” of Section 6(g) of the FTC Act, under which the rule was created, doesn’t give the commission the authority to create “substantive rules regarding unfair methods of competition.
The Rule Is Arbitrary and Capricious
She additionally concluded that the “sweeping” rule is an arbitrary and capricious “categorical ban” that violates the Administrative Procedure Act due to its “one-size-fits-all approach with no end date.” The judge also held that the FTC created it based on only a “handful” of “inconsistent and flawed” economic studies that examined the effects of various state policies toward non-competes and without considering less disruptive alternatives.
“The commission’s lack of evidence as to why they chose to impose such a sweeping prohibition — that prohibits entering or enforcing virtually all non-competes — instead of targeting specific, harmful non-competes, renders the Rule arbitrary and capricious,” the opinion says.
Now What for the FTC Rule?
In the immediate and long-term futures, employers do not have to comply with the FTC Rule. However, the tussle over the validity of non-compete agreements isn’t over yet.
The FTC will likely appeal Judge Brown’s decision, and it has already come out and said that it has the authority to police non-compete agreements on a case-by-case basis. Employers can expect future case by case enforcement actions from the FTC.
The argument over the FTC’s rule is likely headed to the United States Supreme Court. Given the Court’s hostility toward administrative agencies, it’s hard to imagine the Court finding in favor of the FTC. It’s also possible that the FTC sees the writing on the wall vis-à-vis the U.S. Supreme Court and does not take an appeal, hoping to preserve its rulemaking authority overall.
Additionally, the National Labor Relations Board’s (NLRB) general counsel continues to take the position that non-competition agreements violate the National Labor Relations Act. The NLRB continues an aggressive employee-friendly agenda, and that includes bringing unfair labor practice charges against employers for what it deems to be improper use of noncompetition agreements.
For now, the enforceability of noncompetition agreements remains governed by individual state laws. Employers should continue to monitor what, if anything, the FTC does by way of appeal.
