The Northern District of Texas recently issued an order to stop the FTC from enforcing the non-compete ban, which was set to go into effect on September 4, 2024.
The FTC promulgated its final rule banning non-compete agreements on April 23, 2024. The rule was intended to promote competition nationwide. Approximately 18% of the United States workforce—30 million people—are currently affected by non-compete agreements. The FTC Rule would have rendered existing non-compete agreements unenforceable for the vast majority of workers.
The FTC Rule banned non-competes on the basis that these agreements are an unfair method of competition. Congress vested the FTC with the power to prevent unfair methods of competition under Section 5 of the FTC Act. See 15 U.S.C. § 45(a)(2).
The North District of Texas’ opinion in Ryan, LLC v. FTC held 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.
The Texas court reasoned that the FTC does not have any substantive rulemaking authority to regulate unfair methods of competition. The court elaborated that the FTC can only promulgate substantively regarding unfair and deceptive acts. This is a major restraint on the FTC’s authority, as the court limited the FTC’s authority to regulate unfair methods of competition to only procedural rulemaking.
Additionally, the court determined that the non-compete rule is arbitrary and capricious because it is unreasonably overbroad without a reasonable explanation and because the FTC failed to address alternatives to the rule.
Looking ahead, the FTC will likely appeal this decision to the Fifth Circuit, and may further appeal to the United States Supreme Court. However, the Fifth Circuit is notorious for striking down regulations promulgated by federal agencies, making the FTC’s likelihood of success particularly low. Moreover, given that the Supreme Court recently issued opinions sharply restraining the power of federal agencies, most notably in Loper Bright v. Raimondo, the FTC may not fare any better in the nation’s highest court.
Employers and employees should take note that a potential nationwide non-compete ban is far off and will not be going into effect this month as proposed. Importantly, the decision in Ryan, LLC does not prevent the FTC from bringing enforcement actions to address non-compete agreements on a case-by-case basis. Moreover, the majority of states currently place at least some restrictions on non-compete agreements. State regulators may continue to limit and ban non-compete agreements moving forward, but the nationwide ban is no longer going into effect.
