This might sound like a familiar story: you start work at a new company and have to sign a seemingly endless mountain of forms and employment agreements during onboarding. One of the agreements that you might have signed is a non-compete agreement, which prevents employees from working for a competing employer or starting a competing business, typically within a certain geographic area and period of time” following the end of their employment. (FTC). In January 2023, the Federal Trade Commission (“FTC”) proposed a new Rule that would ban all non-competes. Id. Naturally, businesses, such as those affiliated with the Chamber of Commerce, were not the most enthusiastic about the Rule, leading them to challenge the Rule in federal court in the case Ryan LLC v. Fed. Trade Comm'n, No. 3:24-CV-00986-E, 2024 WL 3297524 (N.D. Tex. July 3, 2024). The court ruled that the FTC cannot enforce the ban on non-competes. Id. at 11. This post will cover the reasons why the FTC implemented the Rule, the pros and cons of the Rule, the court’s reasoning for halting the Rule, and the implications of the court’s decision.

The FTC provides various rationales for implementing the new Rule, citing the high rate of non-competes among U.S. workers. (FTC). The FTC estimates approximately 20% of workers are subject to non-competes. Id. This estimation served as the catalyst for the FTC's war against non-competes. Id. The FTC argues that non-competes hurt employees by preventing workers from seeking new professional opportunites and decreasing worker competition. Id.

However, the Rule has faced some opposition. Unsurprisingly, the Rule was met with disapproval in the business world, with lawsuits challenging the ban on non-competes in Florida and Pennsylvania. (Madlin Mekelburg, Bloomberg Law). Conversely, state legislatures have supported the Rule. (J. Gidley, et al., White & Case LLP). Since the Rule was proposed, a ban on non-competes was passed in New York, but it was ultimately vetoed by Governor Hochul. Id. Meanwhile, California has strengthened its ban on non-competes by expanding the state ban’s reach and creating a private right of action against employers who violate it. Id.

The pros of the FTC’s ban revolve around a common theme—supporting employees’ freedom. The FTC overview of the Rule succinctly denotes this sentiment, "[b]ecause non-compete clauses prevent workers from leaving jobs and decrease competition for workers, they lower wages for both workers who are subject to them as well as workers who are not." (FTC). If an employee is looking for a new job, they may have to settle for lower compensation because the non-compete prevents them from accepting a more desirable job—restricting their freedom. Another negative side effect of non-competes is their impact on startups. Id. In an announcement on the Rule in April of this year, FTC Chair Linda Khan argued that non-competes prevent employees from capitalizing on new ideas and bringing those ideas into the market. (FTC). Chair Khan also added the assumption that if the Rule is implemented, 8,500 new businesses will be created each year, with new business formation growing by 2.7% each year. Id. 

Because the new Rule will ultimately affect all businesses, the regulation attracted its critics. (Madlin Mekelburg, Bloomberg Law). One major con of the Rule is that non-competes help reduce employee turnover by restricting an employee’s employment options. (ST Legal Group). Non-competes can also secure employees in long-term positions, which provides employees job security. Id. Another con is that non-competes encorage companies that invest substantial time and resources into employees’ careers, since the non-competes would disallow employees to transfer such valuable knowledge to another company. Id. Most importantly, non-competes protect the company's trade secrets, which encourages more competition in the market. Id.   

Ryan LLC challenged the Rule on April 23, 2024. Ryan LLC at 4. The court’s reasoning contains implications on a changing world in administrative law. Ultimately, the court decided that the FTC could not enforce the rule. Id. at 11. The court's reasoning is derived from the arbitrary and capricious doctrine, which requires "agency action be reasonable and reasonably explained.” Id. Applying the arbitrary and capricious standard to the FTC’s Rule, the court decided that the FTC imposed "a one-size-fits-all approach with no end date." Id. The court stated that this approach was not reasonable or reasonably explained, and thus failed the arbitrary and capricious standard. Id. This led to the court deciding that the FTC could not enforce the Rule. Id at 17. The court’s decision could impact administrative law. Since Chevron deference has been overturned, judges now have considerable power over administrative agencies. (Jeff Turrentine, NRDC). In light of the FTC’s Rule, Ryan LLC can now serve as precedent in the new landscape of administrative law in which the court possesses power to interpret agency law and instruct any overreaching it desires.

You do not need to be a fortune teller to predict that the FTC will appeal the court’s decision. (Madlin Mekelburg, Bloomberg Law). The Fifth Circuit Court of Appeals in New Orleans would hear the case if the FTC decides to appeal. Id. This specific Court of Appeals is crucial because it has been a popular playground for challenges to federal regulatory power. Id. Since it would be reasonably assumed that this particular Court of Appeals would not be favorable to the FTC, the FTC's best shot at reversing the court’s decision would be in the Supreme Court. (Trevor Bradley, et al., National Law Review). What happens if the decision to bar the Rule is sustained? The short answer is nothing. (J. Gidley, et al., White & Case LLP). Non-competes will continue to be enforceable. Id. However, the Rule and subsequent court cases have placed non-competes in the public spotlight and could fuel more policy conversations about the pros and cons of non-competes. Id.  

In conclusion, the court striking down the FTC’s ban on non-competes will be at the expense of employees’ freedom and will prevent the sharing of new ideas that spark innovation. The only hope for a reversal of this decision will lie in the Supreme Court, but until that happens non-competes will remain enforceable.