The FTC’s Rule on Non-Compete Agreements
The FTC’s 2024 Rule on Non-Compete Agreements — Where Do Things Stand?
The Federal Trade Commission made headlines in 2024 with the promulgation of a “Non-Compete Rule” intended to supplant state law and render most non-compete agreements unenforceable. Much has changed regarding the Non-Compete Rule in the past year, leaving many (both within and outside of the legal industry) asking — what’s the status?
What is the FTC Non-Compete Rule and How Did We Get There?
Non-compete agreements traditionally have been regulated at the state level, both through statutes and caselaw, since (until recently) no federal law broadly addressed the enforceability of non-competes. But in January 2023, the FTC proposed the Non-Compete Rule to “prohibit employers from entering into non-compete clauses with workers starting on the rule’s compliance date” and to “require employers to rescind existing non-compete clauses no later than the rule’s compliance date.” 88 Fed. Reg. at 3483. The proposal was adopted in April 2024 and, subject to limited exceptions (including the Rule’s application to senior executives set forth above), essentially provides that it is an unfair method of competition—and therefore a violation of Section 5 of the FTC Act—for persons to enter into or enforce non-compete agreements. By its own language, the Rule supersedes state laws that would “permit or authorize” non-compete agreements. Id. at § 910.4. Not surprisingly, the legal challenges to the Rule began almost immediately.
Challenges to the FTC’s Non-Compete Rule Filed in Federal Court
Ryan LLC v. Federal Trade Commission, Cause No. 3:24-cv-00986-E, Northern District of Texas, Dallas Division
The same day the FTC adopted the Rule, Ryan LLC brought suit against the FTC in the Northern District of Texas, Dallas Division, based at least in part on the Administrative Procedure Act (“APA”) in 5 U.S.C. § 706(2). The operative complaint, filed on May 1, 2024, asserted various causes of action against the FTC, including: (1) the FTC acted without statutory authority in adopting the Rule; (2) the Rule is the product of an unconstitutional exercise of power; (3) the FTC’s act, findings, and conclusions are arbitrary and capricious; and (4) a claim for relief under the Declaratory Judgment Act declaring the Rule unlawful. See https://www.ftc.gov/legal-library/browse/rules/noncompete-rule. Order Granting Summary Judgment Setting Aside Rule (“NDTX Order”). Also on May 1, 2024, Ryan filed its Motion for Stay of Effective Date and Preliminary Injunction. The Northern District of Texas granted Ryan’s motion and issued a preliminary injunction on July 3, 2024.
Later, in ruling on the parties’ competing motions for summary judgment, the Northern District held that Section 6(g) of the FTC Act “does not expressly grant the Commission authority to promulgate substantive rules regarding unfair methods of competition,” such that the FTC “exceeded its statutory authority” in enacting the Rule. Id. at pp. 16, 22. This conclusion having pretermitted further discussion of statutory bases, the Court then concluded that the FTC’s Rule is both arbitrary and capricious because it is “unreasonably overbroad without a reasonable explanation” given the “lack of evidence as to why they chose to impose such a sweeping prohibition,” and because “the Rule is based on inconsistent and flawed empirical evidence” and “fails to consider the benefits of non-compete agreements.” Id. at pp. 23-24. The Court emphasized its order has “nationwide effect, is not party-restricted, and affects persons in all judicial districts equally” such that “[t]he Rule shall not be enforced or otherwise take effect on its effective date of September 4, 2024, or thereafter.” Id. at pp. 26-27 (internal citations omitted).
ATS Tree Services, LLC v. Federal Trade Commission, Case No. 24-1743, Eastern District of Pennsylvania
During this same timeframe, the Eastern District of Pennsylvania reached the opposite conclusion and upheld the Rule. There, the Court held the plaintiff had failed to demonstrate irreparable harm and had likewise failed to establish “‘a reasonable chance, or probability, of winning” and, therefore, was not entitled to injunctive relief. See Memorandum opinion (Doc. 80), at p. 15. With regard to irreparable harm, the Court stated that in the Third Circuit, “nonrecoverable compliance costs are not a valid basis for a finding of irreparable harm.” Id. at p. 16. Separately, contrary to the opinion in Ryan, the ATS Court held that the FTC has substantive rulemaking authority as nothing in Section 5 or 6 of the FTC Act “expressly limits the FTC’s rulemaking power to issuing exclusively procedural rules,” nor has Congress “expressly limit[ed] the FTC’s enforcement mechanisms to adjudications.” Id. at p. 25. Rather, the Court held that Section 5’s directive to “prevent” inherently contemplates substantive rulemaking authority, which it held was consistent with the history of the Act, including the 1975 and 1980 amendments to the Act demonstrate “that the intent of Congress was to retain the existing authority empowering the FTC to prevent unfair methods of competition, and the discretion to determine the appropriate mechanisms to accomplish that directive.” Id. at p. 31. Still further, the Court held that the major questions doctrine was inapplicable because the Rule “falls squarely within the core mandate” of the FTC. Id. at p. 37. For these reasons, the Court denied plaintiff’s motion to stay and request for preliminary injunction.
Properties of The Villages, Inc. v. Federal Trade Commission, Case No. 5:24-cv-316-TJC-PRL, Middle District of Florida, Ocala Division
On July 2, 2024, in the Middle District of Florida, Properties of the Villages, Inc. challenged the FTC’s Non-Compete Rule on the following grounds: (1) the FTC lacked substantive rule-making authority; (2) even if the FTC has substantive rule-making authority, it exceeded its authority; (3) the FTC Rule is impermissibly retroactive; and (4) the Rule violates the Commerce Clause. Notably, the Plaintiff did not claim the Rule to be arbitrary or capricious. After reviewing the opinions in both Ryan and ATS, the Court granted the Plaintiff’s Motion to Stay and Preliminary Injunction, despite reaching different conclusions on the various causes of action. First, contrary to the Ryan opinion, the Court determined that, read together, the 1975 and 1980 amendments to the FTC Act show Congress conferred rule-making authority to the FTC with regard to unfair methods of competition—specifically, that “Congress gave the FTC authority to prevent unfair methods of competition not just go after someone who already engaged in it, and that authority resides in Section 6(g).” See Preliminary Injunction, Doc. 59, Excerpt from Transcript of Hearing at pp. 12-13. The Court also held the plaintiff had failed to show a substantial likelihood of success on merits of its claims that the Rule is unconstitutional and impermissibly retroactive. Id. at p. 13.
Nevertheless, based on “recent jurisprudence from the Supreme Court, in combination with the breadth and scope of the FTC’s final rule,” the Court determined it was required to “consider the rule in the context of the major questions doctrine.”[1] Id. Under this doctrine, where “an agency claims to have the power to issue rules of extraordinary economic and political significance” it must “point to clear Congressional authorization for the power it claims.” Id. at p. 15. The Villages court held that the doctrine applied and that the FTC had failed to show any such authority from Congress.
Noting that Section 6(g) “may not be the behemoth that the Commission says it is,” the Court was persuaded by the fact that the Commission had never previously attempted substantive rulemaking of this magnitude. Id. at p. 20. “[T]his lack of historical precedent, coupled with the breadth of authority the Commission now claims, is a telling indication that the final rule extends beyond the Commission’s legitimate reach.” Id. at 21 (internal citations omitted). Because “an administrative agency’s power to regulate must always be grounded in a valid grant of authority from Congress,” and given the scope and breadth of the FTC’s Non-Compete Rule, the Court concluded that “the Section 6 language, both by its text, placement, context, and history, falls short.” Id. at pp. 22-23. The Villages court thus held that the plaintiffs had shown a substantial likelihood of success on its claim that the FTC exceeded its authority and granted the plaintiff’s permanent injunction. Unlike the Ryan opinion, however, the Court held that its injunction prohibited only enforcement of the rule as to the plaintiff in that case, rather than nationwide.
Status of the FTC Rule – Where Are We Now?
For Now, It Appears the FTC Will Continue Its Focus on Non-Competes Through Enforcement Actions Rather Than Any Substantive Rule
After initially filing notices of appeal in the Fifth Circuit (Ryan) and Eleventh Circuit (Villages), on September 5, 2025, the FTC dismissed its notices of appeal in each circuit and took steps to accede to the vacatur of its Non-Compete Rule. With regard to the Rule, the FTC website now reads “The Non-Compete Rule is not in effect and is not enforceable.” See https://www.ftc.gov/legal-library/browse/rules/noncompete-rule. However, the day before dismissing its notices of appeal, the FTC filed an enforcement action and simultaneous proposed settlement agreement against the largest pet cremation company in the country on the basis of abuse of employer-employee post-termination non-compete clauses as an anti-competitive practice in violation of Section 5 of the FTC Act. The filing of this action indicates the FTC’s continued focus on non-competes, despite vacatur of the Rule. Indeed, while discussing the FTC’s vacatur of the Rule due to an overreach of its statutory authority, FTC Chair Andrew Ferguson noted that, going forward, the FTC will enforce existing antitrust laws “vigorously against those who demand their employees enter into non-compete agreements so pernicious and so onerous as to make them anticompetitive,” and will do so under the framework of the Sherman Act’s pre-existing “rule of reason” analysis, which is a case-specific reasonableness test.
Given this action, companies who use non-compete agreements across the organization regardless of title, compensation, or harm to the company, may garner the attention of the FTC sufficient to trigger increased scrutiny or, worse, a formal investigation or enforcement action. In order to avoid such risks—which could involve a company-wide investigation, document collection, depositions, reputational harm to the company and, potentially, implementation of a company-wide consent order or compliance requirements—employers should consider a more customized approach to non-competes that takes into consideration the specific facts of each circumstance. It also bears minding that the Rule did include carve-outs for officers, directors, and senior employees, the sale of a business by pre-existing equity holders of that business, and senior employees with “unique access to competitively sensitive information.”
Vacatur of the FTC Rule Means That State Laws Are Back in Play
Apart from any FTC enforcement actions, vacatur of the FTC Rule means that pre-existing state laws are now back in play. In Texas, the enforceability of a covenant not to compete is statutory as set forth in the Texas Business and Commerce Code since 1989. See Tex. Bus. & Com. Code §15.50(a) (“[A] covenant not to compete is enforceable if it is ancillary to or part of an otherwise enforceable agreement at the time the agreement is made to the extent that it contains limitations as to time, geographical area, and scope of activity to be restrained that are reasonable and do not impose a greater restraint than is necessary to protect the goodwill or other business interest of the promise”).
Whether a covenant’s limitations are reasonable is a question of law, and Texas decisions analyzing the reasonableness of time, geography, and scope of activities restricted in covenants not to compete “are fact-specific” and “vary depending largely on the particular facts and circumstances of each individual case.” GTG Automation, Inc. v. Harris, No. 11-16-00317-CV, 2018 Tex. App. LEXIS 8876, at *8 (Tex. App.—Eastland Oct. 31, 2018, no pet.). “In the context of an employment contract, generally, a reasonable area for purposes of a covenant not to compete is considered to be the territory in which the employee worked while in the employment of his employer.” See id. at *9. “By contrast, in cases dealing with the sale of a business, it is necessary to protect the goodwill that the buyer purchased . . . a reasonable area is that which is no larger than necessary to protect the business sold . . . Therefore, with a purchase agreement, the nature and extent of the previously owned business is the proper focus.” See id. at *9-10.
Within this statutory framework, if the covenant is unreasonable, the Court will not merely invalidate the provision but will “reform the covenant to the extent necessary to cause the limitations contained in the covenant as to time, geographical area, and scope of activity to be restrained to be reasonable.” Tex. Bus. & Com. Code § 15.51 (c).
Conclusion and Key Takeaways
If fully implemented, the FTC’s 2024 Non-Compete Rule would have resulted in a nationwide ban on non-compete agreements, with few exceptions. The recent vacatur of the Rule removes this specter but leaves in place what appears to be the FTC’s ongoing focus on non-compete agreements through enforcement actions rather than by way of a substantive rule. The end result and takeaways are fairly clear:
The decisions in Ryan and Properties of the Villages likely remain instructive in challenging substantive rules promulgated by the FTC in the future, as well as pertains to application of the major questions doctrine and other considerations inherent to a challenge under the Administrative Procedure Act.
The FTC Non-Compete Rule promulgated in 2024 has since been vacated, is not in effect, and is not enforceable.
The FTC will continue in its focus on non-compete agreements through enforcement actions aimed at agreements it considers anticompetitive. Companies who enforce such agreements across their organization regardless of the case-by-case factors such as employee title, compensation, and potential harm to the company, should consider a more customized approach to non-compete agreements in an effort to avoid further scrutiny by the FTC.
Vacatur of the Rule means that state laws are once again in play, and such laws will vary from state to state.
In Texas, the context of an employment contract, generally, a reasonable area for purposes of a covenant not to compete is considered to be the territory in which the employee worked while in the employment of his employer. With regard to the sale of a business, a reasonable area is that which is no larger than necessary to protect the goodwill of the business sold, requiring a focus on the nature and extent of the business sold.
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