Federal Trade Commission

September 2024 Update: FTC Non-Compete Ban Blocked Nationwide: What It Means for Employers and Employees

The debate surrounding non-compete agreements has reached new heights, with the Federal Trade Commission (FTC) leading efforts to significantly limit or outright ban these agreements across the U.S. The FTC's proposed rule, which was set to take effect on September 4, 2024, aimed to prevent employers from using non-compete clauses in employment contracts, arguing that these clauses suppress wages, hinder competition, and restrict worker mobility. However, a Texas federal court issued a nationwide injunction on August 20, 2024, halting the FTC's enforcement of the ban. This ruling is part of an ongoing legal battle that is likely to be appealed, and its outcome will shape the future of non-compete agreements for millions of workers and employers.

In this blog, we'll dive deep into the history of the FTC's non-compete ban, the court's decision to block it, and what the future might hold for employers and employees. We'll also discuss the current state of non-compete agreements at the federal level and provide actionable steps for businesses to stay compliant with evolving laws.

What Is a Non-Compete Agreement?

A non-compete agreement is a contract clause that restricts an employee's ability to work for a competitor or start a similar business for a specified period after leaving their current employer. Employers use non-competes to protect trade secrets, maintain their competitive advantage, and prevent employees from taking valuable knowledge to a rival.

Historically, these agreements were more common in industries where intellectual property and proprietary knowledge were crucial, such as tech or research-based fields. However, the use of non-compete agreements has expanded in recent decades, even to lower-wage jobs in retail, healthcare, and food service, sparking criticism from labor rights groups and regulators.

FTC's Push for a Nationwide Ban

In January 2023, the FTC announced a proposal to ban most non-compete agreements, arguing that these clauses unfairly limit competition and harm workers by locking them into jobs with lower wages and fewer opportunities for advancement. According to the FTC, non-compete agreements affect approximately 30 million workers across various industries, making it a significant labor issue.

The proposed rule would have:

• Prohibited future non-compete agreements: Employers would no longer be able to include non-compete clauses in new contracts.

• Nullified existing agreements: Employers would be required to rescind all current non-compete agreements, except for certain senior executives, and notify employees that these agreements are no longer enforceable.

• Allowed limited exceptions: Certain non-competes related to the sale of businesses or for high-level executives earning above a certain threshold would have been allowed under the rule.

The FTC justified this move by pointing to studies showing that non-competes stifle innovation, reduce wages, and prevent workers from seeking better job opportunities. By eliminating these agreements, the FTC argued that wages would rise, labor mobility would increase, and overall competition in industries would improve.

The Legal Challenge: Ryan LLC v. FTC

Not surprisingly, the FTC's proposal faced immediate pushback from businesses, industry groups, and legal experts who argued that the agency overstepped its authority. One of the first major challenges came from Ryan LLC, a Texas-based tax services company. In Ryan LLC v. FTC, the company, supported by the U.S. Chamber of Commerce and other business groups, argued that the FTC did not have the legal authority to issue such a sweeping ban on non-compete agreements.

In July 2024, a Texas district court granted a preliminary injunction, limiting the FTC's ability to enforce the rule against Ryan LLC and the plaintiff intervenors in the case. This ruling opened the door to further legal challenges and set the stage for the nationwide injunction that would follow.

Nationwide Injunction: Blocking the Ban

On August 20, 2024, the U.S. District Court for the Northern District of Texas issued a ruling that blocked the FTC from enforcing the non-compete ban nationwide. The court found that the FTC had exceeded its statutory authority in attempting to ban non-competes and ruled that the agency's action was "arbitrary and capricious."

Specifically, the court held that:

• The FTC exceeded its authority: The court ruled that the FTC lacked the power to issue substantive rules on unfair methods of competition, arguing that such actions were beyond the scope of the FTC Act.

• Arbitrary and capricious rulemaking: The court found that the FTC's rule was overly broad and lacked a strong empirical basis. The court criticized the agency for failing to consider less disruptive alternatives and for not adequately justifying such a sweeping prohibition.

This decision has had immediate implications for employers and employees alike, as it effectively halts the enforcement of the non-compete ban for the foreseeable future.

Appeals and the Future of the FTC's Ban

While the Texas court's decision represents a significant victory for opponents of the FTC's rule, the battle is far from over. The FTC is expected to appeal the decision to the Fifth Circuit Court of Appeals, a conservative-leaning court that has often ruled against regulatory overreach. If the Fifth Circuit upholds the injunction, the case could ultimately be appealed to the U.S. Supreme Court, which would make the final determination on the FTC's authority to regulate non-compete agreements.

In the meantime, employers can continue using non-compete agreements in accordance with state laws. However, the FTC has indicated that it may pursue enforcement actions on a case-by-case basis, targeting specific industries or companies that use non-competes in an anti-competitive manner.

What Should Employers Do Now?

For employers, the current legal uncertainty surrounding non-competes presents a challenge. While the nationwide injunction means that the FTC's rule is not enforceable for now, businesses should still prepare for the possibility that the ban could be reinstated in the future.

Here are a few steps employers can take to mitigate risk:

• Review existing agreements: Ensure that all non-compete clauses comply with current state laws and are narrowly tailored to protect legitimate business interests, such as trade secrets or customer relationships.

• Explore alternatives: Employers should consider using non-solicitation agreements or confidentiality agreements as alternative methods for protecting their business. These types of agreements are less likely to face legal challenges and are still enforceable in most states.

• Stay informed: The legal landscape around non-competes is constantly evolving, and employers should keep a close eye on developments in both federal and state courts.

What Should Employees Do Now?

For employees, the nationwide injunction provides a temporary reprieve from the FTC's non-compete ban. However, workers bound by non-compete agreements should still be aware of their rights and options, particularly if they live in states where non-competes are already restricted or banned.

• Review your contract: Employees should carefully review their non-compete agreements and consult with an attorney if they believe the terms are overly restrictive or unenforceable.

• Know your rights: Workers should understand their rights under state law and any potential future changes to federal law regarding non-compete agreements.

• Stay informed: The future of non-competes remains uncertain, and employees should stay informed about changes to both federal and state laws that could impact their ability to seek new job opportunities.

The nationwide injunction against the FTC's non-compete ban marks a significant turning point in the ongoing debate over these agreements. While the FTC's efforts have been blocked for now, the legal battle is far from over. Both employers and employees should stay vigilant as this issue moves through the courts and prepare for the possibility that non-compete agreements could be further regulated or even banned in the future.

The Law Office of Aaron Resnick will continue to monitor the situation and provide updates on any further legal developments. For employers and employees looking for guidance on non-compete agreements and compliance with current laws, our team is here to help. Contact us today for a consultation.