Federal Court Stops FTC Non-Compete Ban, Nationwide

In April 2024, the Federal Trade Commission (FTC) issued a rule prohibiting non-compete agreements in all but the most limited circumstances. First proposed in January 2023, the FTC argued that non-compete agreements were unfair methods of competition, because they reduce an employee’s ability to switch jobs for higher pay, disadvantage people not covered by them by reducing the number of people leaving jobs (making fewer jobs available), and hurt the economy by limiting the ability of businesses to hire employees covered by such agreements. The FTC estimated that 30 million workers (nearly one out of every five Americans) may be subject to non-compete agreements, which historically have been governed (and allowed) under state law statutes and court decisions. The FTC’s rule effectively would have pre-empted those laws, and prohibited enforcement of non-competes nationally. The ban’s effective date was set for September 4, 2024. 

Unsurprisingly, several lawsuits seeking to halt the ban were filed. Yesterday, Judge Ada Brown, of the federal Northern District Court of Texas, issued an order blocking the rule. Even though the suit was brought by a single company (along with intervenor U.S. Chamber of Commerce), the court concluded that because the rule was an unlawful agency action, it cannot be enforced anywhere in the United States.

The court anchored its determination that the FTC had acted unlawfully on two grounds: first, Congress never granted the FTC the power to make substantive (as opposed to procedural) rules regarding unfair competition; and second, the rule was so overly broad as to be arbitrary and capricious. In support of that second conclusion, Judge Brown wrote: “The Rule 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.” As such, “The Commission’s lack of evidence as to why they chose to impose such a sweeping prohibition – that prohibits entering or enforcing virtually all non-competes – instead of targeting specific, harmful non-competes, renders the Rule arbitrary and capricious.” The judge faulted the agency for relying on “inconsistent and flawed empirical evidence,” and failing to consider the positive benefits of non-compete agreements. 

It has long been thought in the employment arena that the FTC’s examination of non-compete agreements was triggered by cases such as Jimmy John’s, which required its sandwich makers to sign such agreements. Many would agree that policy was extreme and unnecessary while also believing – as did Judge Brown – that the FTC's “sweeping prohibition” went too far the other way.

While no appeal has yet been filed, the FTC is likely to take that step. In the interim, the agency says it will continue to examine non-compete agreements “on a case-by-case basis” to determine whether the agreement before it constitutes unfair competition. 

If and until higher courts weigh in, Judge Brown’s decision stands. Non-compete agreements will be, as before, assessed and enforced according to state law. 

Judge Brown’s decision (remarkably clear and well-written, in light of the somewhat arcane legal issues at stake) can be found here: Brown Opinion

We will be watching closely for further developments in non-compete law, and will keep our clients advised accordingly. In the meantime, feel free to call any of the attorneys at Nemeth Bonnette Brouwer with your questions.