The FTC's rule invalidating most non-competition clauses in the United States would have gone into effect on September 4, 2024; now the FTC's rule is on indefinite hold as this court decision winds its way through the appeals process likely into 2025
Much ink has been spilled since the U.S. Federal Trade Commission ("FTC") issued its final rule banning most "non-competition" agreements between U.S. employers and workers. But, as we predicted in our prior alert, the FTC's asserted authority for enacting such broad-sweeping agency action was always a "big swing" and a federal judge in Dallas has now acknowledged it was a "miss." In the case of Ryan LLC v Federal Trade Commission, Judge Ada E. Brown of the Northern District of Texas ruled July 3, 2024, that the FTC lacks authority under Section 6(g) of the FTC Act to issue binding regulations governing "unfair methods of competition" and therefore cannot move forward with its proposed nationwide ban of non-compete agreements. Judge Brown separately held that even if the agency had substantive rulemaking authority (it does not, said the court), the FTC's non-compete ban still would fail as "arbitrary and capricious" and therefore beyond the agency's mandate under the Administrative Procedure Act. The Court made this finding based on its conclusion that the FTC's one-size-fits-all ban targeting all forms of non-competes, rather than just those the agency's studies found to be harmful, was unsupported by the administrative record.
The ruling keeps the FTC from enforcing the ban against the challengers in this case and technically only applies to those parties — not to every employer in the United States. But the court says it will enter a final order on the merits by August 30, 2024, just a few days before the September 4, 2024, date by which the FTC's rule would otherwise go into effect. That ruling, we expect, will have nationwide implications. We also expect an appeals court to review the court's final decision in this case and that, ultimately, a final ruling on the FTC ban will not be made before 2025.
While the FTC's ruling is now on ice and may never have the force of law, it is part of a growing trend towards greater scrutiny of non-competition agreements and worker oversight by the federal government, in particular by the FTC. The FTC continues to police non-competes through its investigation authority and can open individual enforcement actions as it has done over the last 18-24 months. This ruling therefore does not curtail the FTC's enforcement authority on a case-by-case basis.
If the appeals courts affirm this ruling (which we believe to be likely), employers will continue to be subject to a state law patchwork that has traditionally regulated this space. While some states have banned non-competes in most contexts, such as California, Minnesota, Oklahoma, and North Dakota, many others have limited them to higher-wage earners only or passed other restrictions on their use. The New York Legislature recently passed a law that would have effectively banned non-competes except for high earners, but Governor Kathy Hochul vetoed the bill principally over concerns that the salary threshold pushed by the Legislature was too high (she reportedly favored an exception for employees earning $250,000 and up). It is likely the federal court's decision stalling the FTC's ban will revive New York's efforts (and those of other states) to enact similar legislation limiting non-competes to high-wage earners only. Employers should remain alert to state-level changes as they emerge.
As we have previously advised, regardless of how the FTC's ban is treated by the appellate courts, companies would be wise to take several active measures to preserve competition-sensitive data that may not be able to be preserved through non-competition covenants in a landscape increasingly hostile to their enforcement. Trade secret litigation in particular is likely to grow (and has been growing) as a consequence of these events.
Among other proactive measures, companies should strengthen exit and entrance procedures for personnel onboarding and offboarding, remind employees of their confidentiality and information security obligations while employed, review and amend written policies governing confidentiality of company data, and adopt technical measures to protect competition-sensitive data (such as auditing and classifying confidential data and trade secrets based on their value and sensitivity level, creating and enforcing access-control protocols, and making use of technology that allows you to track anomalous data flows).
Stay tuned as we track further developments on the litigation challenging the FTC's non-compete ban and how the lower court's ruling fares on appeal. In the meantime, Happy Fourth of July!
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