FTC’s Noncompete Ban Will NOT Go Into Effect

The Federal Trade Commission’s new rule banning noncompete agreements will not go into effect on September 4, 2024. The rule has been declared unlawful by a Texas federal court and “set aside with nationwide effect” for all employers. 

In 2023, the FTC concluded that noncompetition agreements are a method of unfair competition. Ignoring state laws across the country which already significantly restrict noncompete agreements, the FTC issued a rule in April 2024 prohibiting employers from using them with any worker and rendering most existing noncompete restrictions unenforceable. This rule was to take effect on September 4, 2024. 

Several lawsuits challenging the legality of the rule were immediately filed. You may remember that in July a federal court in Texas preliminarily ruled against the FTC ban on noncompetes. The court postponed the effective date of the rule but only for the parties involved in the lawsuit – mainly the U.S. Chamber of Commerce and Ryan, LLC, a Texas tax firm. The court has now issued its final decision on the parties’ arguments in that case, declaring the rule unlawful and setting it aside, with nationwide impact, for all employers. 

The Texas trial court determined that Congress did not explicitly give the FTC substantive rulemaking authority as to unfair methods of competition. Thus, the FTC exceeded its authority in issuing a ban on noncompete agreements. 

Further, the court found the rule arbitrary and capricious under the Administrative Procedure Act (APA) because “it is unreasonably overbroad without a reasonable explanation.” Unlike state laws which parse out specific factual situations in which noncompetes are unlawful, the FTC’s rule used a “one-size-fits-all approach.” The court determined that the “lack of evidence as to why they chose to impose such a sweeping prohibition . . . instead of targeting specific, harmful non-competes renders the Rule arbitrary and capricious.” 

The APA directs a court to “hold unlawful and set aside” the action of an administrative agency which is “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.” Thus, the Texas court declared the FTC’s rule banning noncompetes to be unlawful and set it aside as to all employers, nationwide. The court explained: “The Rule shall not be enforced or otherwise take effect on its effective date of September 4, 2024, or thereafter.” 

The FTC may appeal this decision, and we will keep you posted on developments as always. For the time being, Nevada employers can focus on ensuring their noncompete restrictions meet the parameters of Nevada law. 

If you would like assistance with a noncompete agreement, or you have questions about Nevada law, please contact a KZA attorney.

KZA Employer Report articles are for general information only; they are not intended and should not be construed to be legal advice. Reading or replying to such articles does not establish an attorney-client relationship. In addition, because the subject matters and applicable laws discussed in Employer Report articles are often in a state of change and not always applicable to every type of business entity or organization, readers should consult with counsel before making decisions based on the same.