Battle Over FTC’s Noncompete Ban Continues

Employment Law

December 18, 2024

The battle over the Federal Trade Commission’s (FTC) ban on noncompete agreements may not be over, as the agency has appealed a federal court decision which struck down the rule nationwide.

In April 2024, the FTC issued a final rule finding that noncompete agreements constitute an unfair method of competition in violation of Section 5 of the FTC Act, banning nearly all noncompetes.

The rule, set to take effect on Sept. 4, 2024, faced immediate challenges in multiple courts.

In Pennsylvania, a federal court sided with the agency and denied an employer’s motion for a preliminary injunction staying the effective date of the rule. The court found that the employer failed to establish irreparable harm, as monetary loss and business expenses alone are not enough to provide the basis for injunctive relief, and the employer was unable to demonstrate a likelihood of success on the merits of its claim.

A district court judge in Texas reached the opposite conclusion, however. First the court granted a preliminary injunction postponing the effective date of the rule and then followed up with an opinion granting the employer’s motion for summary judgment and setting aside the rule.
Section 6(g) of the FTC Act does not expressly grant the Commission authority to promulgate substantive rules regarding unfair methods of competition, the court said, while Section 18 limits the FTC’s ability to make rules dealing with unfair or deceptive practices—not unfair methods of competition.

“Plainly read, the Court concludes the FTC has some authority to promulgate rules to preclude unfair methods of competition,” the court wrote. “Indeed, the Act alludes to this power in Section 18. However, after reviewing the text, structure, and history of the Act, the Court concludes the FTC lacks the authority to create substantive rules through this method. Section 6(g) is ‘indeed a ‘housekeeping statute,’ authorizing what the [Administrative Procedures Act] terms ‘rules of agency organization procedure or practice’ as opposed to ‘substantive rules.’”

In addition, the court found the rule arbitrary and capricious “because it is unreasonably overbroad without a reasonable explanation” and “imposes a one-size-fits-all approach with no end date, which fails to establish a ‘rational connection between the facts found and the choice made.’”

Holding that the FTC promulgated the noncompete rule in excess of its statutory authority and that it was arbitrary and capricious, the court ruled it was unlawful and set it aside.
In October, the agency filed notice that it will appeal the decision to the Fifth U.S. Circuit Court of Appeal, setting up continued litigation over the issue.

Why it matters: In addition to the Pennsylvania and Texas cases, a third lawsuit was filed in Florida by an employer challenging the FTC’s noncompete ban. The district court granted a preliminary injunction in favor of the employer and the FTC filed an appeal of that decision as well to the Eleventh Circuit. While employers await the outcome of the agency’s appeals, the FTC’s noncompete rule remains on hold nationwide.