Though Olympic fever has waned, competition is still making national news. In early 2024, the Federal Trade Commission promulgated a Rule which would ban the future use of non-compete agreements, while also retroactively invalidating prior such agreements, save very few and narrow exceptions. The Rule was slated to take effect on September 4, 2024.
Federal Court Finds FTC’s Non-Compete Ban Violates Administrative Law Requirements
The FTC’s Rule, which sought to ban the future use of non-compete agreements and retroactively invalidate existing ones (with very few exceptions), was set to take effect on September 4, 2024. However, Judge Brown found that the Rule exceeded the Commission’s authority under the FTCA. The court emphasized that the FTC is only permitted to regulate “unfair or deceptive practices—not unfair methods of competition,” making the proposed ban on non-compete agreements an unlawful overreach.
Too Broad a Brush: Court Rules FTC’s Non-Compete Ban is Arbitrary and Capricious
In addition to finding the Rule outside the scope of the FTCA, the court also determined that the FTC’s non-compete ban was arbitrary and capricious under the Administrative Procedure Act (APA). The Rule’s broad prohibition on virtually all non-compete agreements, regardless of the specific circumstances, was criticized for its lack of targeted focus. The court expressed skepticism about the FTC’s methodology, particularly its reliance on data from various state policies and economic studies without providing alternative, less restrictive solutions that align with the FTC’s legitimate authority.
As a result, the court set aside the Rule in its entirety. Since decisions invoking the APA have nationwide effect, this ruling is binding at the national level. However, states remain free to regulate non-compete agreements as they see fit. State laws on competition practices are unaffected by this decision, and state legislatures may choose to enact stricter regulations, taking inspiration from the FTC’s now-invalidated Rule.
Going Forward: The Ongoing Debate Over Non-Compete Agreements
Approximately one in five Americans are bound by non-compete agreements, which the FTC argues stifle economic growth by limiting workers’ ability to “freely switch jobs” and “depriving [workers] of higher wages and better working conditions.” On the other hand, companies and industries that rely on non-compete agreements, particularly for the protection of trade secrets, have welcomed the court’s decision.
The FTC has indicated it may appeal the ruling. Meanwhile, similar legal challenges to non-compete bans are making their way through district courts in Florida and Pennsylvania. With varying outcomes in these cases, the likelihood of a circuit split increases, potentially setting the stage for a future Supreme Court decision to resolve the issue.
