FTC Nationwide Noncompete Ban Back in Court
The Federal Trade Commission (FTC) challenged a Texas District Court’s decision to strike down its proposed nationwide ban on noncompete agreements. The FTC filed a notice of appeal with the United States Court of Appeals for the Fifth Circuit on Oct. 18. The Fifth Circuit’s ruling in this case could affect almost all noncompetes across the country.
A decision by the appellate court will not come until long after the Nov. 5 election. But the result of that election may influence the future of FTC efforts to limit these restrictive covenants. A continuation of efforts started during this presidential term or a change in direction are both on the table and could depend on which administration takes office.
The lawsuit began in April, when the FTC issued a new Final Rule. It barred employers nationwide from entering into noncompetes with workers and required them to rescind existing noncompetes before Sept. 4, 2024. The FTC argued that noncompete clauses were “unfair methods of competition” under Section 5 of the FTC Act and that it had the power to issue the rule pursuant to Section 6(g) of the same act. The FTC’s stated rationale for the ban was that such agreements are exploitive, deprive workers of the freedom to change jobs, result in lower wages, and stifle innovation and the creation of new businesses.
Generally, the only exceptions to this ban were:
- Existing agreements for “senior executives”
- Noncompetes entered into in connection with the bona fide sale of a business
- Noncompetes enforced where the cause of action accrued before the rule’s effective date
With an impending deadline, employers faced the decision to either prepare to give notice to rescind their agreements or hope for a reprieve from the courts. Not surprisingly, the FTC’s nationwide ban faced immediate legal challenges.
Ryan LLC, a tax services and software firm in Dallas, along with the United States Chamber of Commerce and other business groups, filed emergency motions to stop the FTC from enforcing the rule. They argued that the agency acted beyond the scope of its statutory authority and that the rule was arbitrary and capricious. On July 3, 2024, the United States District Court for the Northern District of Texas granted those motions. It temporarily blocked the rule until it could hear more arguments on the matter. Then the plaintiffs filed motions to strike down the rule permanently. The FTC filed a counter motion to declare the rule valid.
Just days before the Sept. 4 deadline, the Texas federal court struck down the nationwide ban. It found that the FTC overstepped its authority and that the rule was arbitrary and capricious. The court explained that Section 6(g) of the FTC Act did not expressly grant the agency the authority to promulgate substantive rules regarding unfair methods of competition. The court further noted that agencies must operate within the bounds of authority explicitly granted by Congress. It ruled that the FTC’s expansive interpretation of its own rulemaking power was overly broad and unsupported by the statutory text.
It's unclear how the FTC’s appeal will be received by the Fifth Circuit, especially in light of the U.S. Supreme Court’s recent decision in Loper Bright Enterprises v. Raimondo, in which the Court overturned Chevron v. Natural Resources Defense Council, limiting the deference federal courts must show to agency decisions.
Following the Loper decision, this past August, the Fifth Circuit vacated a U.S. Department of Labor (DOL) rule that established when an employer could take a tip credit for tipped employees under the Fair Labor Standards Act (FLSA). However, just a month later, the Fifth Circuit backed up the DOL, affirming that the agency had the authority to impose minimum salary requirements for white-collar overtime exemptions under the FLSA.
Employers should watch this appeal closely as it makes its way through the court. Contact Mark Fijman or any member of Phelps’ labor and employment team if you have questions or need advice and guidance.
