On August 20, 2024, a federal judge struck down the Federal Trade Commission’s (FTC) proposed ban on non-compete agreements, blocking its enforcement on a national basis.
As discussed in an earlier client alert, the FTC issued a Final Rule that, on its September 4, 2024 effective date, would have invalidated nearly all existing non-compete agreements and barred employers from entering into non-compete agreements with workers in the future. In striking down the Final Rule, U.S. District Judge Ada Brown held that the FTC exceeded its statutory authority when it adopted the Final Rule, and that the Final Rule itself was arbitrary and capricious.
Judge Brown first concluded that the FTC lacked the authority to issue the Final Rule because Congress only authorized it to issue procedural or “housekeeping” rules to address unfair methods of competition, not substantive rules. “The role of an administrative agency is to do as told by Congress, not to do what the agency thinks it should do,” the court reasoned. The fact that there are no statutory penalties for violating rules promulgated by the FTC further supported the court’s conclusion that the FTC lacked substantive rulemaking authority.
The court then found that the Final Rule was arbitrary and capricious—a standard that considers the reasonableness of an agency’s action—“because it is unreasonably overbroad without a reasonable explanation” and would impose “a one-size-fits-all approach with no end date.” The court pointed out that no state in the country has enacted a non-compete ban as broad as the FTC’s sweeping Final Rule and underscored that the Final Rule may have targeted specific, harmful non-competes, rather than imposing a blanket “categorical ban.”
Based on these reasons, the court ultimately concluded that the Final Rule was “an unlawful agency action” requiring it to be set aside with nationwide effect.
The FTC is considering an appeal of the decision. It is also possible that the FTC may seek to stay the court’s decision pending the appeal. Whatever the FTC ultimately decides, it is clear that employers are relieved—at least for the time being—from the obligations originally set to take effect on September 4th.
It is important to remember, however, that no matter how welcome this latest development, non-competes continue to be heavily scrutinized. For example, the FTC emphasized that the court’s decision does not “prevent [it] from addressing non-competes through case-by-case enforcement actions.” The General Counsel of the National Labor Relations Board also takes the position that non-compete agreements violate the National Labor Relations Act, and a number of states have passed or proposed legislation limiting the use of non-competes.
Employers are encouraged to review their use of non-compete agreements, including reviewing which employees are required to sign them and ensuring they are narrowly tailored to meet state law requirements.
For further information, please contact:
Nick Zaino
Partner
203.578.4270
nzaino@carmodylaw.com
Giovanna Tiberii Weller
Partner
203.575.2651
gweller@carmodylaw.com
Vincent Farisello
Partner
203.578.4284
vfarisello@carmodylaw.com
Sarah Healey
Partner
203.578.4225
shealey@carmodylaw.com
Maria Laurato
Associate
203.784.3157
mlaurato@carmodylaw.com
This information is for educational purposes only to provide general information and a general understanding of the law. It does not constitute legal advice and does not establish any attorney-client relationship.