The Federal Trade Commission's (FTC) controversial nationwide ban on non-compete agreements between employers and employees was struck down last week in federal court.
In April 2024, the FTC issued a nationwide rule banning non-compete agreements between employers and employees, including the enforcement of existing agreements.
The rule required employers to notify employees with existing non-compete agreements that their agreements were unenforceable as of September 4, 2024, with a few exceptions for highly compensated senior executives.
The rule also prohibited employers from entering into new non-compete agreements after the effective date, without exception.
According to the FTC, roughly 20% of all workers have signed non-competes. The rule would have invalidated and precluded nearly 30 million such agreements.
The rule faced immediate challenges by employers, who feared that it would make it very difficult to prevent unfair competition, to protect their investment in employees, and to protect against misappropriation of confidential and proprietary information. It was also challenged by the US Chamber of Commerce, the nation’s largest business lobby.
The legal basis for challenging the rule was that the FTC had overstepped its authority by enacting a “substantive” rule, without going through the legislative process. Challengers also argued that the rule was “arbitrary and capricious” because the FTC “failed to consider an important aspect of a problem in creating this rule or offered an implausible justification for its action.”
Last Tuesday, August 20, a Texas federal judge permanently barred the implementation of the controversial FTC rule. The court agreed that the FTC overstepped its authority in issuing this substantive rule, and that the rule was arbitrary and capricious because it is “unreasonably overbroad without a reasonable explanation,” imposing “a one-size-fits-all approach with no end date.” This decision applies nationwide to all employers and employees.
The FTC will likely appeal the decision, though the chances of success are dubious, and plans to continue to examine the validity of non-compete agreements on a case-specific basis. But for now, there is no blanket ban on non-compete agreements.
Employers may continue to enter into non-compete agreements--although such agreements may be scrutinized for enforceability by both courts and the FTC--and do not have to provide any notification to employees with existing agreements.
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