Court Strikes Down FTC’s Proposed Ban on Non-Competes

Authors: Bernard (Barry) A. Nigro Jr., Nathaniel L. Asker, Aleksandr B. Livshits, Peter L. Simmons, Jeffrey Ross, Nathaniel Bronstein, Lexi Michaud

A federal district court in Texas has issued an injunction barring on a nationwide basis the FTC's proposed rule that would have banned most employee non-compete agreements.[1] The court concluded that the FTC lacks the statutory authority to issue the rule and that the rule is arbitrary and capricious.[2] As a result, the FTC's non-compete rule will not take effect on the scheduled effective date of September 4, 2024.

Highlights

1. The rule exceeds the FTC's rulemaking authority. The court determined that the text, structure, and history of the FTC Act demonstrate that the FTC lacks the authority to issue substantive rules with respect to conduct that constitutes "unfair methods of competition," such as the proposed non-compete rule.
   
   
2. The rule is arbitrary and capricious. The court found that the rule is arbitrary and capricious because it is based on "inconsistent and flawed empirical evidence, fails to consider the positive benefits of noncompete agreements, and disregards the substantial body of evidence supporting these agreements."[3] The court also found that the FTC failed to consider less disruptive alternatives to achieving the agency's objectives.
   
   
3. Nationwide relief. The court rejected the FTC's arguments that any relief should be limited to the named plaintiffs only, finding that the Administrative Procedure Act does not contemplate party-specific relief and provides for nationwide effect.

Looking Forward

This ruling provides significant relief for employers who rely on reasonably tailored non-compete agreements to protect their legitimate business interests. However, the FTC has already stated that the agency is "seriously considering" appealing the decision,[4] and the White House announced that it continues to support the FTC's ban on non-compete agreements.[5] The FTC further stated that the Texas court's decision "does not prevent the FTC from addressing noncompetes through case-by-case enforcement actions."[6] An appeal is indeed likely, as in separate cases challenging the non-compete rule, federal judges in Pennsylvania and Florida suggested that the FTC does have substantive rulemaking authority.[7]

As a result, and in light of state law restrictions on employee non-competes, employers should continue to monitor developments in these cases and consult with legal counsel regarding their non-compete agreements and overall strategy for retaining and protecting employees, goodwill, and trade secrets.

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