Federal Judge Blocks FTC Noncompete Ban from Taking Effect Nationwide

Yesterday, a federal judge in Texas enjoined the Federal Trade Commission’s Noncompete Rule from taking effect nationwide. The ruling bars the implementation of a controversial FTC regulation--scheduled to take effect September 4, 2024--that would have invalidated nearly 30 million existing non-compete agreements and prohibited any such future agreements. The decision effectively maintains the status quo for both employees and employers who had been approaching Labor Day with uncertainty due to contradictory rulings from other courts over the summer. However, there is some hope for those who celebrated the initial FTC rule as bipartisan bills that seek to limit noncompetitive clauses make their way through both houses of Congress.  

The April FTC Regulation

In April, the FTC issued a regulation (the “Non-Compete Rule” or “Final Rule”) that, on its September 4, 2024, effective date, would have barred the enforcement of existing non-compete covenants in all but a handful of cases involving highly compensated senior executives. Upon finding that such agreements are inherently anti-competitive and violate anti-trust doctrines, the Final Rule also prohibited employers from entering into new non-competition agreements as well.  

Employee rights advocates celebrated the FTC Non-Compete Rule, as employers and trade groups railed against it. The FTC estimated that banning noncompete agreements would increase workers’ earnings by at least $400 billion over the next decade. The agreements affect roughly one in five American workers, or around 30 million people, according to the agency, whose purview includes antitrust and consumer protection issues. After receiving over 26,000 public comments, the FTC determined that the use of non-compete agreements with workers constitutes an “unfair method of competition” in violation of Section 5 of the FTC Act.

Conflicting Legal Rulings Over the Summer

Within 24 hours, the U.S. Chamber of Commerce headlined a lawsuit challenging the non-compete ban, arguing that the FTC does not have authority under the FTC Act to make rules regulating unfair methods of competition (Ryan LLC v. Federal Trade Commission). The plaintiffs also challenged the rule on other grounds, including that it is an unconstitutional delegation of legislative power, that it impermissibly applies retroactively to existing non-compete agreements, and that it is arbitrary and capricious, as the FTC issued the final rule based on limited and flawed studies without sufficient consideration of the concerns and alternatives raised during the public comment period.

On July 3, Judge Ada Brown of the United States District Court for the Northern District of Texas issued the first ruling in these pending challenges to the Final Rule. Judge Brown preliminarily enjoined—temporarily blocked—the Final Rule from going into effect on September 4, 2024, but only with respect to the plaintiffs in in that case, and signaled that the Final Rule is unlikely to pass final judicial review on the merits for a number of reasons.

On July 10, 2024, the FTC, defending a separate lawsuit, argued that the FTC’s mission is to prevent unfair methods of competition, and thus the Final Rule falls squarely within its rule-making authority. Judge Kelley Brisbon Hodge of the U.S. District Court for the Eastern District of Pennsylvania agreed and ruled in favor of the FTC—refusing the request for a preliminary injunction in that case. Judge Hodge went further in their ruling, concluding that the FTC Act expressly empowers the FTC “to make rules and regulations for the purpose of carrying out the provisions” of the statute, which include “prevent[ing]…unfair methods of competition.”

Late last week, a Florida federal court followed the example of its Texas counterpart, issuing a preliminary injunction but only as to the parties before the court, further complicating the landscape.

Nationwide Injunction

Judge Ada Brown of U.S. District Court for the Northern District of Texas—who issued the temporary injunction on the FTC rule last month in Ryan LLC v. FTC—ruled that the antitrust agency lacked authority to issue substantive rules related to unfair methods of competition, including the noncompete rule, which would have prohibited companies from restricting their employees’ ability to work for rivals. Her decision on Tuesday makes the injunction permanent, and nationwide in scope. In other words, the FTC Non-Compete Rule will not take effect, maintaining the status quo for both employers and employees. While this is a crushing blow for employee rights groups and employees, employers and trade groups are celebrating the ruling.

Hope on the Horizon

These cases are sure to make their way through the appeals process and towards the U.S. Supreme Court. But that process can take years to play out. All is not lost for employee advocates, however.

The movement to limit non-competition agreements is widely popular. The FTC received more than 26,000 comments on the proposed rule, with over 25,000 comments (more than 96%) in support of the FTC’s proposed ban.

A bipartisan bill to limit non-compete agreements (the “Workforce Mobility Act”) has been making its way through both houses of Congress. U.S. Senators Todd Young (R-Ind.) and Chris Murphy (D-Conn.) introduced it in the Senate, with Senators Tim Kaine (D-Va.) and Kevin Cramer (R-N.D.) co-sponsoring the legislation. Congressmen Scott Peters (D-Calif.) and Mike Gallagher (R-Wis.) introduced the legislation in the U.S. House of Representatives.

Optimists suggest that Congress could pass the companion bills as soon as it is back in session, rendering the conflicting judicial rulings on the FTC rule irrelevant.  

What’s Next

 For both groups, the legal jockeying this summer brings awareness to the issue from both sides of the table.

Existing non-competition agreements will continue to remain in effect in states where they are enforced. If you are an employee, you can contact your representatives in Congress to advocate for the Workforce Mobility Act. If you are an employer, you can breathe a sigh of relief, for now, that your legitimate business interests are protected. 

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