Updating Our July 2024 Article on the FTC’s Nationwide Ban on Noncompete Agreements

Background

As detailed in our May article, on April 23, 2024, the FTC finalized a Non-Compete Clause Rule banning employers under its jurisdiction from using non-compete agreements with any worker, regardless of their job title or income, unless the agreement is part of selling a business. As part of the Rule, existing non-compete agreements would become unenforceable for most employees, except those classified as “senior executives” under the Rule.

The Ryan Case

When the Rule was released, Ryan LLC filed a lawsuit in the Texas District Court against the FTC, arguing that the agency exceeded its authority under the Federal Trade Commission Act by creating rules that dictate substantive aspects of competition regulation. On July 3, 2024, as discussed in our July article, the District Court granted Ryan’s motion for a stay and preliminary injunction, agreeing that the FTC lacks authority to enforce the non-compete ban. However, the court restricted this relief to the plaintiffs, opting at the time not to issue a universal injunction or extend it to members of the plaintiffs’ business associations.

August Update

On August 20, 2024, the court granted summary judgment for the plaintiff and issued this order setting aside the FTC’s ban on non-compete agreements and ordered that the Rule shall not be enforced or otherwise take effect on September 4, 2024. This means employers will not be required to void employee’s existing non-competes covered by the Rule, and are no longer required to send employees notices regarding the status of any non-competes.

In granting summary judgment, the court reasoned that the FTC lacked the authority to implement the Rule, as Congress had not granted the agency authority to promulgate substantive rules regarding unfair methods of competition. The court also held that the rule was “arbitrary and capricious” in violation of the Administrative Procedure Act “because it is unreasonably overbroad without a reasonable explanation” and that “the Rule imposes 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 decision also questioned “[t]he Commission’s lack of evidence as to why they chose to impose such a sweeping prohibition” rather than “targeting specific, harmful non-competes.”

Future Outlook

As we write this article on August 22, 2024, the FTC’s website states: “The FTC is considering an appeal. The decision does not prevent the FTC from addressing noncompetes through case-by-case enforcement actions.” It is anticipated the FTC will continue to pursue enforcement actions against companies that utilize non-compete agreements, particularly for lower-wage workers. For further inquiries or questions regarding the status of the FTC Rule, or non-compete agreements generally, please contact me at smigala@lavellelaw.com or at (847) 705-7555. Thanks go to Nathan Toy for assistance with this month’s article.