Federal Trade Commission’s Non-Compete Ban on Life Support
On Tuesday, August 20, 2024, the United States District Court for the Northern District of Texas halted the implementation of the FTC non-compete ban. For now, the ban is not effective and will not become effective unless a higher federal court rules otherwise.
By way of background the FTC banned the majority of non-competes when it promulgated its new rule on April 23, 2024. The ban did void all existing non-compete covenants except for certain senior executives, bona fide sales of businesses, circumstances where a cause of action accrued prior to the effective date of the rule, and circumstances where a person has a good-faith basis to believe that the rule is inapplicable. Among other requirements, the ban required employers to notify affected employees on or before September 4, 2024 that the non-compete between the employer and the employee is no longer enforceable and that employer cannot require the employee to enter into any further non-compete covenants.
In the Northern District of Texas, plaintiffs Ryan LLC and others argued that the FTC exceeded its statutory authority and that the rule was arbitrary and capricious. In the case, Ryan, LLC contended the ban would have caused irreparable harm by requiring the termination of a material number of non-compete covenants in its employment contracts. The plaintiffs argued that the FTC exceeded its statutory authority and that the rule was arbitrary and capricious. The plaintiffs also argued that the Federal Trade Commission Act did not grant the FTC the power to enact such a sweeping rule, and especially one that so significantly altered the legal landscape surrounding non-compete agreements, a landscape mostly within the purview of state law.
The District Court agreed. It granted the plaintiffs' motions for summary judgment and set aside the FTC non-compete rule, preventing it from taking effect. It reasoned that the FTC did not have Congressional authority to create substantive rules, only procedural ones, and that putting forth this substantive rule went beyond the authority granted the FTC by Congress in the Act. Further, the District Court determined that the rule was arbitrary and capricious because the FTC failed to provide a reasonable explanation for the overbroad nature of the rule and also failed to properly consider potential less sweeping alternatives that would appropriately minimize the burden placed on employers. Importantly, the District Court emphasized that the ban was nationwide, and that the FTC cannot enforce the rule:
“As to the FTC's argument that relief should be limited to the named Plaintiffs—the APA does not contemplate party-specific relief. See generally 5 U.S.C. § 706(2). "As [the Fifth Circuit] put it in a couple of recent cases, setting aside agency action under § 706 has ‘nationwide effect,’ is ‘not party-restricted,’ and ‘affects persons in all judicial districts equally.’”
What does this mean?
At this time, we reason that:
1. Affected employers may disregard the law; and
2. No notifications need to be given by employers on September 4; but
3. Employers should look for any changes in the coming days.
Please let us know if you have any questions or concerns.
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