USA Trends and Developments Contributed by: Paul M “Tad” O’Connor III, Joshua D Fulop, Daniel J Koevary and Matthew B Stein, Kasowitz Benson Torres LLP
ments constitute an unfair method of competi- tion and issued a final rule (“the Ban”) prohibiting employers from entering into or enforcing non- compete agreements. The Ban applies to a wide range of workers, including employees and independent contrac- tors. It contains only limited exceptions. Notably, the Ban does not cover industries over which the FTC lacks jurisdiction, does not prohibit some garden leave arrangements (where the employee remains employed during the restricted period and is paid the same compensation and ben- efits), and permits non-compete agreements entered into in connection with the sale of a business. Further, although no new non-compete agree- ments may be entered into, the Ban permits employers to enforce pre-existing non-compete agreements with senior executives – which the FTC estimates, by its definition, is less than 1% of workers – as well as any claims that have accrued prior to the Ban taking effect. Nota- bly, the Ban also does not prohibit less onerous post-employment restrictions, including non- solicitation and non-disclosure agreements, so long as they do not functionally operate like a non-compete agreement. The Ban was set to take effect on 4 Septem- ber 2024. However, numerous challenges to its constitutionality followed. On 20 August 2024, the Ban was struck down by the Northern Dis- trict of Texas in Ryan, LLC v Fed Trade Comm’n (“Ryan”), which held that the FTC exceeded its statutory authority by issuing the Ban. More spe- cifically, even though the court acknowledged that the FTC has some rule-making power to regulate unfair methods of competition through
housekeeping or interpretive-type rules, the court found the FTC had never previously prom- ulgated substantive rules and lacked the author- ity to do so. Further, the court reasoned that the Ban was arbitrary and capricious because it relied on inconsistent and flawed data, failed to consider the benefits of non-compete agree- ments and imposed a sweeping approach, as opposed to a more targeted and less disruptive rule targeting specific, harmful non-competes. The ruling effectively prevents the Ban from tak- ing effect. The FTC is expected to appeal the August deci- sion in Ryan to the US Court of Appeals for the Fifth Circuit. Many court observers believe the Fifth Circuit will uphold the Ryan decision, which may set up an eventual circuit split and US Supreme Court appeal. Nonetheless, wheth- er or not the Ban ultimately is upheld, there is no denying that it has altered the landscape for non-compete agreements by putting momentum behind the movement to impose additional limi- tations on non-compete agreements. With the federal government sidelined for the time being, the authors anticipate that states will reclaim the mantle of regulating non-com- pete agreements. Indeed, there are numerous bills pending in states to expand worker protec- tions against non-compete agreements and it is expected that such legislative efforts to adopt portions of the Ban will only continue to increase.
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