FTC noncompete ban is banned

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Yesterday (August 20, 2024), Judge Ada Brown did everyone a favor and issued the court’s final decision on the FTC’s noncompete rule ten days early — 15 days before the rule was to take effect.

Despite doubts along the way, Judge Brown did exactly what we all expected would happen since the FTC first announced the rule: She vacated it.

Her ruling has nationwide effect and eliminates the enormous uncertainty companies and employees were facing about what would happen on September 4. Lest there be any doubt, that uncertainty was not a good thing — unless the goal was just to create and benefit from the chaos (which is not very sportsman-like).

The decision

The court’s decision resolved dueling summary judgment motions from the plaintiffs and from the FTC.

The court started its analysis with the following quote about the Administrative Procedures Act (the primary basis for challenging the FTC’s noncompete rule):

“Congress in 1946 enacted the APA ‘as a check upon administrators whose zeal might otherwise have carried them to excesses not contemplated in legislation creating their offices.’” Loper Bright Enters. v. Raimondo, 144 S. Ct. 2244, 2261 (2024) (quoting United States v. Morton Salt Co., 338 U.S. 632, 644, 70 S. Ct. 357, 364, 94 L. Ed. 401 (1950)). 

As the court explained, when evaluating agency conduct under the APA, “courts must ‘hold unlawful and set aside agency action, findings, and conclusions found to be . . . arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law,’ ‘contrary to constitutional right, power, privilege, or immunity;’ or ‘in excess of statutory jurisdiction, authority, or limitations, or short of statutory right.’”

All of those standards were at issue.

The court started with the FTC’s alleged statutory authority.

Based on a thorough review of the language and legislative history of the FTC Act and the key sections at issue (sections 5, 6(g), and 18), the FTC’s prior rulemaking, and relevant caselaw, the court concluded that “the FTC lacks substantive rulemaking authority with respect to unfair methods of competition.” The court observed, “Agencies do not have unlimited power to accomplish their policy preferences until Congress stops them; they have only the powers that Congress grants through a textual commitment of authority.”

Separately, I particularly appreciated the court’s nod (whether intentional or not) to Representative Matt Gaetz’s attempted power grab: “The judiciary remains the final authority with respect to questions of statutory construction and must reject administrative agency actions which exceed the agency’s statutory mandate or frustrate congressional intent.’ Am. Fin. Servs. Ass’n v. FTC, 767 F.2d 957, 968 (D.C. Cir. 1985).”

The court then evaluated the rule under the APA’s arbitrary and capricious standard.

The court concluded that the rule’s “one-size-fits-all approach” is “unreasonably overbroad” — one of the very points that I together with over 100 other lawyers made to the FTC in 2023 (and before), when we tried to convince the FTC not to allow the abuses of noncompetes to overshadow their legitimate uses.1

The court’s analysis bears out that precise point:

In enacting the Rule, the Commission relied on a handful of studies that examined the economic effects of various state policies toward non-competes. (See ECF No. 210 at 37). The record shows no state has enacted a non-compete rule as broad as the FTC’s Rule. (See, e.g., ECF No. 210 at 686, 881). The FTC’s evidence compares different states’ approaches to enforcing non-competes based on specific factual situations—completely inapposite to the Rule’s imposition of a categorical ban. (See ECF No. 210 at 46–47). As to this latter point, the FTC provides no evidence or reasoned basis. The Commission’s lack of evidence as to why they chose to impose such a sweeping prohibition—that prohibits entering or enforcing virtually all non-competes—instead of targeting specific, harmful non-competes, renders the Rule arbitrary and capricious. In sum, the Rule is based on inconsistent and flawed empirical evidence, fails to consider the positive benefits of non-compete agreements, and disregards the substantial body of evidence supporting these agreements.

(Case citation and footnote omitted.)

Having concluded both that the FTC lacked authority to issue the rule and that the rule is arbitrary and capricious, the court ended its substantive analysis and turned to the appropriate remedy.

Quoting the APA, the court began:

The APA directs the reviewing court to:

(2) hold unlawful and set aside agency action, findings, and conclusions found to be—

(A) arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law;

(B) contrary to constitutional right, power, privilege, or immunity;

(C) in excess of statutory jurisdiction, authority, or limitations, or short of statutory right; without observance of procedure required by law[.]

“The text of the APA means what it says.” Loper Bright Enters., 144 S. Ct. at 2262. 

(Emphasis in original.)

Addressing head on the biggest open issue for those of us awaiting the decision — whether the decision would be limited to the parties — the court made clear that “the APA does not contemplate party-specific relief.” Quoting the Fifth Circuit Court of Appeals, the court explained, “[S]etting aside agency action under § 706 has ‘nationwide effect,’ is ‘not party-restricted,’ and ‘affects persons in all judicial districts equally.’” Accordingly, the court held that the rule is “unlawful” and “is hereby SET ASIDE and shall not be enforced or otherwise take effect on September 4, 2024, or thereafter.” (Emphasis in original.)

As you were…

So what does this all mean?

It means that, despite the multi-year flurry of activity and wave of uncertainty, we are back to where we were on January 4, 2023 — before the FTC issued its proposed rule.

Companies can now go back to using noncompetes without the concern that the protections afforded by those agreements will be taken away by administrative fiat (at least for the foreseeable future).

That said, there are still six noncompete bills in Congress and four of the ten bills to ban noncompetes outright pending in the states.

And, more immediately, the FTC can still bring enforcement actions to make an example out of a handful of companies using noncompetes. Although the FTC’s resources are supposedly already strapped, I do expect we will see a handful of enforcement actions.

We may also see state attorneys general taking action. Remember that a handful of them urged the FTC to adopt a ban (despite that their states did not support a ban) and brought actions against Jimmy John’s and others.

So with that backdrop, as we have always recommended, companies should use noncompetes when they are actually needed, not when they are not. While important, noncompetes should not be the only one companies rely on. There are many steps company can and should take to protect their information and retain their customers, including:

  • Reviewing and updating agreements and policies to ensure compliance with all of the new state-law developments. This includes, in particular, noncompetes, broad confidentiality agreements, and other agreements in the crosshairs (including no-recruit agreements, nonsolicitation agreements, anti-moonlighting provisions, and training repayment agreements (pejoratively called “TRAPs”)), as well as internal policies that my be treated like impermissible restrictions on employee competition.
  • Reviewing and updating procedures (including the use of data loss prevention software) for protecting trade secrets, other confidential information, and goodwill (see trade secret protection program primer and checklist).
  • Using supplemental agreements and approaches to mitigate the impact of the tightening restrictive covenant laws. For example:
    • Notice provisions (“true” garden leave clauses) may, to the extent enforceable, offer meaningful protection for a short term.
    • Springing noncompetes (a court-ordered noncompete as a remedy for a violation of other restrictive covenants or obligations) may create both a deterrence effect and provide a partial remedy for wrongdoing that is discovered early enough. This is a tool created years ago for a client who did not want to use a noncompete, but was worried about the impact of employees violating the other restrictive covenants. It has since been incorporated into Massachusetts noncompete law (MNAA, G.L. c. 149, § 24L(c)).
  • Emphasizing training. Never lose sight of one of the easiest and most effective tools you have is to educate and train employees, especially at onboarding and off-boarding, and with special attention to employees working remotely.

These are just highlights. There are many more to consider. Now is the time.

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Firm resources: 

We know how hard it is to keep up with the ever-changing requirements around the country. To help, we have created the following resources (available for free):

We hope you find all of these resources useful. More are coming.

And please note, we are grateful for all of the input we’ve received over the years. We welcome any suggestions for improvements that you may be willing to share.

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[1] The thing I found most galling about the FTC’s arguments was the FTC’s hubris and attempt to gaslight the public, claiming that regulating noncompetes “falls squarely within the Commission’s . . . expertise.” What expertise? It has no noncompete expertise. The day before issuing the proposed rule in 2023, it brought three unprecedented cases and then used them to prop up its purported expertise.

* * *

*Thank you to Erik Weibust for being the first to send me the decision yesterday, right after it came out! 

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