Last year, the Federal Trade Commission (FTC) proposed a significant change aiming to implement a nationwide ban on noncompete agreements for almost all workers.
The FTC’s final rule banning noncompete agreements was set to take effect on September 4, 2024, but was met with opposition from various business organizations who argued that the rule overstepped the FTC’s legal authority. Several lawsuits were filed to block the rule, including Ryan LLC v. FTC. The groups argued that the FTC did not have the statutory authority to issue such a broad ban on noncompetes, and that the rule was “arbitrary and capricious in its application”.
NFIB filed an amicus brief in the case, urging the court to invalidate the rule.
The Court Case: Ryan LLC v. FTC
On August 20, 2024, the federal court in the Northern District of Texas ruled in favor of the plaintiffs and blocked the FTC’s noncompete rule from taking effect. The ruling was based on two primary arguments:
- The FTC had exceeded its statutory authority, and
- The rule was unreasonably broad and did not sufficiently consider alternatives
At the core of the court’s decision was whether the FTC had the legal authority to enact a sweeping ban on noncompete agreements. The FTC based its authority on Section 6(g) of the FTC Act, which allows the agency to create rules to prevent “unfair methods of competition.” The court, however, found that this section of the FTC Act does not explicitly grant the agency the power to implement substantive rules, such as the proposed noncompete ban.
The court emphasized that the FTC’s authority under the law was limited to procedural rules, and issuing a broad substantive rule like a blanket ban on noncompetes required explicit authorization from Congress.
With the court’s decision, the FTC’s noncompete rule will not go into effect as planned. While the government might appeal the district court decision, for the time being, noncompete agreements will continue to be governed by state laws,.
Employers who rely on noncompete agreements to protect their business interests can breathe a temporary sigh of relief, but should remain attentive, as the legal battle over noncompete agreements unfolds.
The court’s ruling in Ryan LLC v. FTC represents a significant victory for businesses that rely on noncompetes to protect their competitive interests. NFIB will continue to fight for small businesses in the courts against harmful executive overreach.
If you have any additional questions on the latest updates concerning noncompete agreements, you can email [email protected].
