A Federal Court has Barred The FTC Ban of Non-Compete Agreements

Earlier this year, the Federal Trade Commission (“FTC”) issued a ruling prohibiting the use of non-compete agreements nationwide, which was intended to go into effect on September 4, 2024. Business interest groups opposed the blanket ban of non-competes and quickly challenged the FTC’s ruling, arguing that it is too broad, and it is not backed by a mandate from Congress. A federal district court in Texas has recently sided with this effort to block the non-compete ban.

On August 20, 2024, U.S. District Court Judge Ada Brown granted summary judgment against the FTC in a lawsuit brought by the U.S. Chamber of Commerce and other interested parties. Judge Brown ruled that the non-compete ban exceeded the FTC’s statutory authority. The FTC argued that the “Federal Trade Commission Act” authorizes it to issue rules prohibiting unfair methods of competition. The court disagreed, determining that the FTC’s power in this regard is limited to creating rules of agency procedure. The creation of substantive rules, like the nationwide non-compete ban at issue, goes beyond the FTC’s statutory authority.

The court also found that the non-compete ban is arbitrary and unreasonably overbroad, providing no adequate explanation for the “one-size-fits-all approach with no end date.” The court noted that the FTC could not justify a sweeping ban on nearly all non-competes, rather than targeting “specific, harmful non-competes.” Furthermore, the FTC did not adequately consider alternative approaches that would have sufficiently addressed unfair competition without a nationwide prohibition of non-competes.

For employers nationwide, the court’s decision means that the FTC’s ruling banning non-competes cannot be enforced, and all requirements of the FTC rule are no longer in effect. Employers may continue to utilize non-competes pursuant to state law.

California employers should therefore be aware of the state’s own restrictions on non-compete agreements. In California, non-competes are generally prohibited absent a few limited exceptions. It is recommended for California employers that use non-competes, or intend to use non-competes, to consult with an experienced employment attorney to determine whether they satisfy the conditions for the use of non-compete agreements in California.