The Federal Non-Compete Ban: Timeline and Future Implications

By Matt Helman, University of Virginia

On April 23, 2024, the Federal Trade Commission (FTC) announced a new rule banning noncompete agreements. The rule was supposed to become effective on Sept. 4, 2024 and ban all non-competes, including new and previously signed contracts, except for previous non-competes for senior executives, defined as “workers earning more than $151,164 who are in a policy-making position.” The rule was based under Section 5 and 6(g) of the Federal Trade Commission Act of 1914, as the FTC determined that noncompete agreements were unfair methods of competition. FTC Chair Lina M. Khan explained that “noncompete clauses keep wages low, suppress new ideas, and rob the American economy of dynamism, including from the more than 8,500 new startups that would be created a year once noncompetes are banned.” The rule was estimated to increase business formation by 2.7% per year, increase average worker earnings by an additional $524 per year, and lower health care costs by up to $194 billion over the next decade. In addition, noncompetes tend to negatively affect competitive conditions in labor markets by inhibiting efficient matching between workers and employers. There is also evidence that noncompetes lead to increased market concentration and higher prices for consumers.

Nevertheless, on Aug. 20, 2024, the United States District Court for the Northern District of Texas issued a summary judgment decision on the merits of Ryan LLC v. FTC, enjoining the FTC Noncompete Rule nationwide. Originally, on July 23, 2024, the court in Ryan LLC v. FTC granted a preliminary injunction preventing the FTC from enforcing their noncompete ban, but only to the specific plaintiff. However, the later court issued a broader opinion finding that the FTC exceeded its statutory authority in implementing the noncompete ban. Congress did not grant the FTC affirmative authority to issue substantive rules over unfair competition, but rather through case-by-case adjudication. The FTC rule retroactively invalidated millions of contracts which exceeded the FTC's authority and demonstrated that the agency's interpretation was unaligned with their enabling statute. Additionally, the court held that the rule was “arbitrary and capricious” as the FTC did not consider the benefit of noncompete agreements or the downsides of alternatives.

The FTC rule has also been subject to two other separate legal challenges. On July 23, in ATS Tree Services v. FTC, a federal court in Pennsylvania sided with the FTC. This court found that the plaintiff failed to address the irreparable harm prong of the preliminary injunction test as they could not establish a reasonable likelihood of success on the merits of their underlying cause of action. On the contrary, on August 14, in Properties of the Villages, Inc. v. FTC, a federal court in Florida sided with the plaintiff, granting a preliminary induction to the FTC rule. This court did find that the plaintiff was likely to succeed on the merits of its cause of action and that the FTC rule was beyond the FTC’s authority. Although the court did constrain its decision from nationwide implications. Overall, these conflicting and inconsistent decisions demonstrate that litigation over the controversial FTC noncompete ban is far from over.

The FTC appealed the August 20 decisions on Oct. 18, 2024 in the U.S. Court of Appeals for the Fifth Circuit. Due to the conflicting opinions from the previous legal challenges to the FTC rule, it is more than likely that the appeal will be granted. However, it will be a long up-hill battle following the ruling of Loper Bright Enterprises v. Raimondo. This decision overruled the long-standing Chevron Doctrine precedent which found that courts should defer to competent federal agency interpretations of their own power when it comes to legal challenges. Now, without ‘Chevron Deference,’ the FTC and other federal agencies will need to show increased justifications to ensure that their regulations comply with statutory language. Additionally, the Loper Bright decision gave a lot more power to the judicial system in evaluating the validity of regulations creating a much higher burden for agencies. This is especially troubling, seeing as legal experts have expressed skepticism regarding the FTC rule. James A. Paretti, shareholder at Littler Mendelson P.C., noted that “the idea that for 95 years this agency had the power to do this and just… never bothered to do so… always seemed to me to be a stretch.” Additionally, there are inconsistencies within the FTC rule, such as excluding executives, that were never properly or thoroughly addressed.

Going forward, the President Trump administration is likely to establish a pattern of overturning the FTC ban entirely. Nevertheless, employers need to remember that noncompetes are still a highly regulated field, shown through the fact that 4 states currently ban non-competes. Therefore, employers need to be selective and thoughtful when implementing noncompetes, and it may be beneficial to look towards other methods, such as Non-Disclosure Agreements and Trade Secret Laws, to accomplish their desired goals.

Cover photo taken from Consortium News.