Non-Competes Where Are We Now?

The FTC’s Non-Compete Ban and the Ensuing Challenges

Non-compete agreements generally prevent employees from leaving a job to work for a competitor or to work within a specific industry or field for a specified period of time after employment ends. Previously, non-competes were predominantly regulated by states. A small number of states banned non-competes completely, and a growing number of states limited non-competes in certain industries or by income level, but many states enforced non-competes to the extent they fell within judicially established standards of reasonableness.

The FTC found that non-competes are unfair methods of competition, within the meaning of the Federal Trade Commission Act, 15 U.S.C. § 41, et seq. (the “Act”), because they restrict employee mobility and are often coercively imposed. 89 Fed. Reg. 38364-65. The Rule, which was set to take effect on September 4, 2024, would prohibit enforcement of most new non-competes and void existing non-competes except for those entered into by certain “senior executives.” (The Rule would not apply to companies excluded by the Act, such as certain banks, savings and loan institutions, federal credit unions, non-profits, and common carriers.)

Within hours of the FTC’s vote to promulgate the Rule, Ryan LLC filed a federal lawsuit in the Northern District of Texas to block the Rule’s enforcement. Similar actions to block the Rule followed: on April 25, 2024, ATS Tree Services, LLC filed suit in the Eastern District of Pennsylvania, and, on June 21, 2024, Properties of the Villages, Inc. (“POV”) filed suit in the Middle District of Florida.

The FTC promulgated the Rule pursuant to Sections 5 and 6(g) of the Act, which authorize the FTC to prevent unfair methods of competition and to “make rules and regulations for the purposes of carrying out the provisions of” the Act, respectively. 15 U.S.C. §§ 45(a)(1)-(2) and 46(g). The plaintiffs alleged that: (1) the FTC lacked authority to issue substantive regulations governing unfair methods of competition; (2) even if the FTC had such authority, the Rule exceeded it because it implicated a “major question” that only Congress could decide, and (3) the Rule was arbitrary and capricious in violation of the Administrative Procedures Act, (5 U.S.C. § 706(2)(A)). (Under the “major questions doctrine,” an agency can only decide an issue of extraordinary economic and political significance where Congress clearly delegates the authority to do so. ATS Tree Servs., LLC v. FTC, No. 24-1743, 2024 U.S. Dist. LEXIS 129398, at *52-53 (E.D. Pa. July 23, 2024)).

Each of the plaintiffs moved to preliminarily enjoin the Rule’s enforcement, and each court interpreted the scope of the FTC’s authority differently. The Ryan court, in a July 3, 2024, decision granting the motion, held that the plaintiffs were likely to succeed on their claims that the FTC lacks authority to issue any substantive rules regulating unfair methods of competition (and that the Rule is arbitrary and capricious). Ryan LLC v. FTC, No. 3:24-CV-00986-E, 2024 U.S. Dist. LEXIS 117418, at *15-16 (N.D. Tex. July 3, 2024). Conversely, in a July 23, 2024, decision, the ATS court denied injunctive relief, holding, inter alia, that the Act authorized the FTC to issue such substantive rules and that the Rule fell within the ambit of that authority and did not present a “major question.” In an August 15, 2024, decision, the POV court agreed that the FTC is authorized to issue these substantive rules, but granted an injunction, holding that the Rule implicated a “major question” without a clear delegation of authority by Congress for the FTC to issue the Rule. Props. of the Vills., Inc. v. FTC, No. 5:24-cv-316-TJC-PRL, 2024 U.S. Dist. LEXIS 151982, at *18-24 (M.D. Fla. Aug. 15, 2024).

Ultimately, in an August 20, 2024, decision, the Ryan court set aside the Rule nationwide. The FTC has appealed the Ryan and POV decisions, such that the Rule’s fate remains to be seen, although many employers believe that Ryan and POV will be upheld. (ATS was voluntarily dismissed on October 4, 2024.)

The Rule’s Impact

While the Rule is currently enjoined, worker advocates believe that the Rule (and the proposed rule before it) have spurred state non-compete regulation and helped to alert courts and governmental agencies to the effects of non-competes on workers and the public.

For instance, in General Counsel Memoranda issued on May 30, 2023 and October 7, 2024, respectively, National Labor Relations Board’s former General Counsel Jennifer Abruzzo stated her view that, with limited exceptions, non-competes violate Section 8(a)(1) of the National Labor Relations Act (“NLRA”) by interfering with employees’ rights under Section 7 of the NLRA to collectively act to improve working conditions, such as by “concertedly seeking employment with competitors that offer better working conditions” and describing a plan that would “remedy the harmful monetary effects” of non-competes and similar provisions. (General Counsel Memoranda 23-08 and 25-01).

Moreover, in Globus Med. Inc. v. Jamison, 2:22cv282, report and recommendation adopted, 2023 U.S. Dist. LEXIS 153858 (E.D. Va. Aug. 30, 2023), the Eastern District of Virginia denied a preliminary injunction to enforce a non-compete, acknowledging the evolving “national discussion” on the public interest implications of non-competes and noted that, “while the public interest is served by enforcing valid contracts,” “the FTC’s proposed rule suggests the public interest in enforcing non-compete agreements may no longer be a viable argument.” Id. at *59.

At the state level, California passed legislation enhancing its long-standing ban on most non-competes. Amendments to California Business and Professions Code § 16600, effective January 1, 2024, provide that all non-competes, “no matter how narrowly tailored,” are void, unless a statutory exception applies, confirm that employers cannot enforce such unlawful non-competes regardless of whether the employee worked, or whether the agreement was signed, outside of California, and create a private right of action to challenge unlawful non-competes. As of July 1, 2023, nearly all non-competes were banned in Minnesota, and, since early 2023, several other states, including Illinois, Iowa, Louisiana, Maryland, Pennsylvania, and Rhode Island, have limited the use of non-competes in the healthcare industry. While the New York State legislature passed a non-compete ban, it was vetoed by the governor.

As the Rule is currently (and may be permanently) set aside, employees should continue to abide by existing non-competes. When negotiating non-competes, all parties not only need to ensure that the scope of the restrictions is reasonable and narrowly tailored but must also focus on the choice of law and venue provisions. Given the current patchwork of state laws, until and unless federal regulations come back into play, contractual choice of law and venue provisions can substantively impact rights and obligations stemming from non-competes.