FTC’s Non-Compete Rule Blocked Nationwide

What Does the FTC Non-Compete Rule Say?

On January 19, 2023, the Federal Trade Commission (“FTC”) proposed what’s known as the “Non-Compete Rule,” which would “prohibit employers from entering into non-compete clauses with workers starting on the rule’s compliance date” and “require employers to rescind existing non-compete clauses no later than the rule’s compliance date.” 1

On April 23, 2024, the FTC adopted the final Non-Compete Rule, which made it an unfair method of competition to:

1. Workers other than senior executives. With respect to a worker other than a senior executive, it is an unfair method of competition for a person:
   (i) To enter into or attempt to enter into a non-compete clause;
   (ii) To enforce or attempt to enforce a non-compete clause; or
   (iii) To represent that the worker is subject to a non-compete clause.
2. Senior executives. With respect to a senior executive, it is an unfair method of competition for a person:
   (i) To enter into or attempt to enter into a non-compete clause;
   (ii) To enforce or attempt to enforce a non-compete clause entered into after the effective date; or
   (iii) To represent that the senior executive is subject to a non-compete clause, where the non-compete clause was entered into after the effective date. 2

The FTC’s Authority Challenged

On August 20, 2024, the United States District Court for the Northern District of Texas held that the FTC acted beyond its statutory authority in promulgating the FTC’s Non-Compete Rule (the “Rule”), declaring the Rule arbitrary and capricious. Consequently, the Court ruled that “the Rule shall not be enforced or otherwise take effect on its effective date of September 4, 2024 or thereafter.” 3

The central issue in this case revolved around whether the FTC possessed the statutory authority to issue substantive rules regarding unfair methods of competition. The FTC argued that its authority stemmed from Section 5 of the FTC Act, which prohibits unfair methods of competition, and Section 6(g), which the FTC claimed empowered it to create substantive rules regulating unfair methods of competition.

However, the Court disagreed, finding that Section 6(g) did not expressly grant the FTC the authority to promulgate such substantive rules. Instead, the Court concluded that Section 6(g) is a “housekeeping statute,” allowing the FTC to establish rules related to agency procedure or practice, not to create binding regulations with the force of law.

The Rule is Found Arbitrary and Capricious

The Court also found the FTC’s Non-Compete Rule to be arbitrary and capricious under the Administrative Procedure Act (“APA”). According to Section 706(2) of the APA, the appropriate remedy for such a finding is for the court to hold unlawful and set aside the agency action.

Criticizing the Rule as “unreasonably overbroad,” the Court noted the FTC adopted a “one-size-fits-all approach,” imposing a nationwide ban on non-compete agreements without adequately exploring less drastic alternatives. This blanket prohibition disregarded the varied approaches that individual states have historically taken in regulating such agreements.

The Court noted that no state has enacted a non-compete rule as sweeping as the FTC’s, which banned virtually all non-competes, regardless of the specific circumstances or potential harms. The lack of reasoned analysis, coupled with the FTC’s reliance on inconsistent and flawed empirical evidence, led the Court to conclude that the Rule did not “fall within a zone of reasonableness” and was not “reasonably explained.”

CONCLUSION – The FTC Cannot Enforce the Rule at This Time.

In summary, the Northern District of Texas determined that the FTC’s Non-Compete Rule was unlawful on two grounds: (1) it exceeded the agency’s statutory authority and (2) was arbitrary and capricious. As a result, the Court has set aside the Rule. While the FTC will likely appeal the Court’s ruling to the U.S. Court of Appeals for the Fifth Circuit, the FTC cannot enforce the Rule against any employer, nationwide, at this time.

Additionally, other Courts have reached different conclusions, making the issue ripe for an appellate battle and potential United States Supreme Court opinion. 4

It Is Not Settled Yet, So You Should Still Revisit Your Contracts

As businesses continue to navigate this evolving regulatory landscape, it’s important to remain informed about both federal and state developments. We urge business owners to revisit their contracts and contact us with any questions.

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