FTC’s Noncompete Ban Blocked Nationwide
09.19.24
In a pivotal decision that has significant implications for labor markets and employer-employee relations across the United States, a federal judge has blocked the Federal Trade Commission’s (FTC) near-total ban on noncompete agreements. The ruling halts the FTC’s sweeping Final Rule (the “Rule”), which was set to take effect September 5, 2024.
We discussed the FTC noncompete ban in a prior article which can be accessed here.
On August 20, 2024, U.S. District Judge Ada Brown in Dallas sided with the U.S. Chamber of Commerce and Texas-based tax firm Ryan LLC, who had challenged the FTC’s Rule. In her ruling, Judge Brown concluded that the FTC exceeded its statutory authority, describing the ban as “unreasonably overbroad without a reasonable explanation,” granting Ryan LLC’s motion for summary judgment, and preventing the FTC from enforcing the ban. This decision applies nationwide and represents a significant setback for the FTC, as the agency will not be able to enforce the ban unless it successfully appeals the decision.
About Noncompete Agreements
Noncompete agreements, in general, prevent employees from joining competitors or starting similar businesses for a certain period after leaving their employer. The FTC argued that banning such agreements would benefit the economy by increasing job mobility and innovation. Conversely, employers contended that noncompetes protect their investments in employee training and proprietary information.
Broadly speaking, the enforceability of noncompete agreements has been a matter of state law. The FTC’s Rule would have swept state law rules aside in a significant shift toward federal regulation of employer-employee relations, despite Congress not acting to make any such change. The FTC maintained that it had the authority to enact the rule under its statutory mandate to prevent unfair methods of competition. However, Judge Brown’s ruling brings this assertion into question.
What This Change Means
As noted in our prior article, if allowed to proceed, the FTC’s noncompete ban would likely have had significant effects on employers’ businesses, M&A deal terms, and required significant compliance requirements for businesses to notify most employees and former employees they were no longer bound by prior noncompete agreements. For now, these requirements are on hold.
The ruling by Judge Brown is not the first judicial response to the FTC’s proposed ban. A federal judge in Pennsylvania had previously sided with the FTC, creating a split in judicial opinions. Given this division, the issue is likely to proceed to the appellate courts. Should the FTC choose to appeal (it has until October 19th of this year to do so), the case will be heard by the Fifth Circuit Court of Appeals, a jurisdiction known for challenging federal regulatory power.
For now, this ruling indefinitely delays the implementation of the FTC’s ban. As the situation evolves, all eyes will be on the appellate courts and the potential for Supreme Court involvement, which could ultimately determine the balance of power between federal regulatory bodies, the states, and the judiciary in matters of employment law.
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Prepared by the Corporate Law Practice Group at Rossway Swan Tierney Barry & Oliver, P.L. Contact Kevin M. Barry or Ethan S. Moore for more information.
