The FTC Rule, barring nearly all employment related noncompetition agreements in the United States, which was to go into effect on September 4, 2024, was held to be arbitrary and capricious, and its implementation, stayed by a United States District Court. The effect of the court's ruling is nationwide.  

On April 23, 2024, the FTC, by a 3-2 party line vote, passed a new rule, banning nearly all noncompetition agreements in the United States.  This rule was a modified version of a rule initially proposed by the FTC in January 2023, which was the subject of extensive comment and legal challenge. 

The Rule was published in the Federal Register on May 7, 2004, and was to take effect on September 4, 2024.  Among the legal challenges to the Rule were claims that the FTC lacked power to issue substantive rules of this type, that Congress had not and could not delegate this sort of power to an administrative agency, that non-competes had long been regulated by the States and the FTC could not overrule state regulation without clear Congressional authority, that the Major Questions Doctrine precluded the FTC from taking this action, and that the Rule was arbitrary and capricious, in that it failed to account for and address the many circumstances under which non-competition agreements are signed, but instead, banned nearly all non-competes, including non-competes of a type that State and federal courts had previously ruled were lawful and pro-competitive. 

On August 20, 2024, the U.S. District Court, Northern District of Texas, granted summary judgment against the FTC in Ryan LLC et al. v. Federal Trade Commission, 24-cv-00986 (N.D.Tx.), one of the cases challenging the Rule, finding that the FTC exceeded its authority in passing the Rule, and that the Rule is unlawful.  The court set aside and stayed the rule on a nationwide basis, specifically holding that its ruling applied to all, not just the parties to the Ryan case.  As the court held:  "...setting aside agency action under § 706 has ‘nationwide effect,’ is ‘not party-restricted,’ and ‘affects persons in all judicial districts equally.’...The Rule shall not be enforced or otherwise take effect on its effective date of September 4, 2024, or thereafter." (Slip Op.  at 26-27.)  

Noncompetes have been governed by State law in the US for more than 150 years.  There is noncompete law in virtually every State, with courts typically taking a close look at the specific facts relevant to the situation and the contract at issue, before determining the circumstances under which a noncompete agreement could be valid and enforceable. In at least 47 states – and likely in all – there are circumstances under which noncompetition agreements have been upheld.  Pre-empting State law throughout the country is a big deal, and pre-empting the law of 47 states is even a bigger deal.  The FTC Noncompete Rule involved the federal government in an area in which it was minimally involved in the past, and – unlike the courts that have been looking at these issues for many years – the FTC lumped together and invalidated, through one rule, contracts of a type that courts and legislatures throughout the country, during the more than 100 years since the FTC Act was passed, have previously found to be valid and not anti competitive.   

The FTC Rule concluded that noncompetes are an unfair method of competition (despite the many rulings that in appropriate circumstances, noncompetes are valid, protect a legitimate interest, and can be pro-competitive). 

You would think that these rulings would need to be seriously addressed before unelected FTC commissioners, by a 3-2 vote, decide, despite the contrary decisions of courts in many states, that the use of noncompetes is an unfair method of competition, across the board, and the thousands of private contracts, entered into over the course of many years, are retroactively invalid.  Among the Court's rulings were the following:

" … the Rule is arbitrary and capricious because it is unreasonably overbroad without a reasonable explanation. The Rule imposes a one-size-fits-all approach with no end date, which fails to establish a ‘rational connection between the facts found and the choice made.’”  Slip op. at 23-24.

"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. ... 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.  Slip op. at 24.  

"Having concluded that (i) the FTC promulgated the Non-Compete Rule in excess of its statutory authority, and (ii) the Rule is arbitrary and capricious, the Court must 'hold unlawful' and 'set aside' the FTC’s Rule as required under § 706(2). As to the FTC’s argument that relief should be limited to the named Plaintiffs—the APA does not contemplate party-specific relief. See generally 5 U.S.C. § 706(2)."  Slip op. at 27

The FTC said that it may appeal the Court's decision, and also that it can still "address" noncompetes on a case by case basis.  Given the extensive regulation that noncompetes have recently been subject to, a careful evaluation of present practice is warranted, even in the absence of the FTC Rule.  In addition to federal regulation, State and City governments have been scrutinizing the use of noncompetes.  In New York, serious noncompete regulations passed the legislature.  While that legislation was vetoed by the Governor, further State regulation may occur, and several potential restrictions were proposed in the New York City Council. Other states have enacted or been considering further regulation.  We can assist both in evaluating the risks and benefits of current programs, as well as in developing options that may be less subject to attack and restriction.  Please feel free to contact Abraham Skoff, Allan Grauberd, Kim Klein, or your primary Moses Singer attorney, for additional information.