The FTC’s Ban on Non-Competes Is in Big Trouble: Here’s Why

When the Federal Trade Commission announced its final rule banning most non-competes as an unfair method of competition in April, it devoted plenty of time and effort to explaining why it firmly believed it has the authority to impose such a sweeping mandate.

That authority is now being tested by several pending lawsuits – and the early returns, coupled with a relevant intervening Supreme Court ruling, do not bode well for the rule’s continuing vitality. In fact, several indicators presage a delay in the rule’s effective date – and may even put the rule banning non-competes to bed for good.

Here’s a look at the details – and why the rule is in trouble.

What the FTC Ban on Non-Competes Says

The rule makes most existing non-competes unenforceable. An exception applies to senior executives, who are defined as employees in policy-making positions who earn at least $151,164 annually.

If the rule takes effect, employers would not be able to enter into new non-competes with any employees.

The rule also obligates employers to notify non-senior executive employees who are bound by existing non-competes that the agreements will not be enforced.

Why Did the FTC Ban Non-Compete Agreements?

The FTC says it is an unfair method of competition for employers to enter into non-competes with employees. It claims that a ban would lead to the creation of more businesses and boost average earnings.

When the rule was first proposed, many commenters argued that the FTC lacked the authority to implement it.

They said the federal FTC Act does not give the commission the authority to impose the ban; that the validity of non-competes is a major question the FTC does not have the power to address; and that Congress impermissibly gave the agency authority to set nationwide rules about competition methods.

The agency refuted all of those arguments, insisting that it is authorized to set a rule banning non-competes.

But the rule has taken heavy fire on more than one front.

Lawsuits Challenge Ban on Non-Compete Agreements

Lawsuits challenging its validity were filed quickly, and in early July a federal district court in Texas granted a preliminary injunction that put the rule’s effective date on hold – but only with respect to the plaintiffs in that suit. The court in that case ruled that the FTC exceeded its statutory authority when it made the rule.

That decision followed closely on the heels of a significant Supreme Court ruling. In late June, the High Court did away with a long-standing rule that required courts to defer to reasonable agency interpretations of ambiguous statutory language. The ruling essentially transferred power from agencies to the judiciary branch.

Its holding is a terrible blow to the FTC’s push for a non-compete ban, as there is room for debate as to whether the statutory language relied upon by the agency is adequate to support its regulatory mandate. The Supreme Court ruling is potent ammunition for all litigants who have moved or will move to block the ban.

Another impediment to the ban taking effect is the power of federal district courts to issue nationwide injunctions. Though there is some scholarly debate as to the legitimacy of the practice, a single federal district court may act to block the rule on a nationwide basis.

In fact, a pending suit in Pennsylvania may soon produce that precise result. In that suit, the plaintiff has asked the court to set aside the rule entirely. A ruling in that case is expected by the end of the month.

A final development that could very well have the effect of delaying or even eradicating the rule entirely is the upcoming presidential election. The election will take place just a few short months after the rule’s currently scheduled effective date, and a victory for Donald Trump could easily lead to a move to kill the rule entirely.

The bottom line: The FTC ban on non-compete agreements is vulnerable on several fronts and may not take effect as scheduled on September 4 — if ever.

What Does It All This Mean for HR and Employers?

This is a fluid situation, but here are a few key takeaways:

• Don’t presume the rule will take effect as scheduled. As of this writing, the rule remains set to take effect on September 4, 2024. But ongoing developments make at least a delay likely.
• Remember that non-disclosure and non-solicitation agreements remain valid and enforceable regardless of the status of the non-compete ban. Even if the ban takes effect, such agreements are enforceable so long as they do not function as a non-compete agreement.
• Employers remain free to require agreements that ban the disclosure of trade secrets.
• Take stock of existing agreements. Do you have current non-compete agreements in place? Are they more expansive than necessary, even under existing rules? Do any of them apply to senior executives, as defined by the rule? These are all worthwhile questions to examine now.
• Be aware of existing state laws. Some states, including California, Oklahoma and North Dakota, ban non-compete agreements, while others restrict their use. Be aware of the law in your state.