Strike Three Against the FTC’s Non-Compete Ban

The Federal Trade Commission (FTC) has struck out in enforcing its final rule banning employment non-competes, but there are more innings to go.

How Did the Court Rule, and Why?

The Northern District of Texas had previously enjoined enforcement of the rule on a preliminary basis as to the parties in that case, Ryan, LLC, et al. v. Federal Trade Commission. (Read more about that decision here.) Late Tuesday, August 20, the same court issued a final order — notably more than a week earlier than expected.

Specifically, the court granted summary judgment to the plaintiffs and intervenors challenging the rule and denied the FTC’s motion for summary judgment on the same issues. In striking down the rule, the order clearly declared, “The Court sets aside the Non-Compete Rule. Consequently, the Rule shall not be enforced or otherwise take effect on its effective date of September 4, 2024 or thereafter.”

In short, the court reasoned that in issuing the rule banning non-competes, the FTC exceeded the powers granted to it by Congress in the FTC Act. Following the U.S. Supreme Court’s decision in Loper Bright Enterprises v. Raimondo, however, this is hardly a surprise. Loper Bright had been issued mere days before the Northern District of Texas’s original opinion. After more time and when ruling on the merits, the court relied on Loper Bright in ruling that the FTC did not have authority from Congress to issue the kind of rule it did here when banning non-competes. Judge Ada Brown was persuaded by the lack of prior substantive rulemaking by the FTC in this area and the lack of a penalty provision in the relevant section of the FTC Act.

While that lack of authority was the court’s primary reasoning, it also reasoned that the rule violated “the APA’s [Administrative Procedure Act] arbitrary-and-capricious standard.” Echoing some of the criticism following the rule’s issuance, the court found the rule “unreasonably overbroad without a reasonable explanation. [It] 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 court was not persuaded by the FTC’s consideration and rejection of alternatives to banning employment non-competes on such a broad basis, finding that the FTC “failed to sufficiently address alternatives” and, in fact, “dismissed” them.

This section of the opinion could be viewed as a road map for how to successfully challenge administrative rules given the Supreme Court’s decisions this term altering the standards and timing for such challenges.

What Comes Next?

For now, the rule has been invalidated and cannot be enforced, but appeals are likely. We now have decisions from district courts in the Third, Fifth and Eleventh Circuits, and those decisions have reached varying conclusions and applied different reasoning, but only the Northern District of Texas’s decision is ripe for appeal at this point. Given the several months that the appeals process takes and the slim odds that one or more of these challenges makes it on the Supreme Court’s docket in the upcoming term, we have several months to go before receiving the kind of certainty that a decision from the highest court in the land can provide.

How Should Employers React?

While the immediate concern presented by the FTC rule has been mitigated, non-competes may face continued challenges at both the state and federal level through other legislative or regulatory initiatives. Employers should consider this trend when entering new agreements and determining what restrictions may be appropriate and necessary to protect their businesses in the future.

This current climate still presents an opportunity for employers to take stock of their current practices and determine whether changes are necessary before being forced to do so by applicable law. For instance, to the extent an employer does not currently limit non-competes to “senior executives” or certain leadership positions, it may consider doing so for practical reasons and in anticipation of future changes in applicable law. However, nothing in this decision compels employers to act at this point.

In the event that the FTC rule is brought back to life through the appeals process, employers who had prepared to send notices by September 4 should keep their work in case it becomes necessary down the road.

If you have questions regarding this topic, please contact Fredrikson’s Employment, Labor & Benefits Group.