FTC’s Non-Compete Rule Blocked and Unlikely To Be Revived – But Risk Remains

By: Lee Berger (Steptoe Antitrust)

Last week, a court temporarily blocked the Federal Trade Commission’s (FTC) rule prohibiting non-compete terms in employee contracts. However, this preliminary injunction does not apply nationwide. Despite the bleak outlook for the FTC’s rule, using non-compete provisions still poses risks under certain state laws and potential individual FTC investigations. Companies concerned about the non-compete rule should continue to take precautions to be prepared for possible compliance requirements on short notice.

In April, the FTC issued a broad ban on non-compete terms, which prevent employees from working for competing employers. Soon after, Ryan LLC and the U.S. Chamber of Commerce filed a lawsuit in the Northern District of Texas to block the rule. On July 3, Judge Ada Brown agreed with the plaintiffs and issued a preliminary injunction, arguing that the FTC lacks substantive rulemaking authority concerning unfair methods of competition. The court noted that while the FTC can issue rules on unfair or deceptive acts, it lacks express statutory authority for rules on unfair competition methods. Additionally, the court found the non-compete ban arbitrary and capricious, criticizing its one-size-fits-all approach without an end date and lack of evidence supporting the need for a total ban or consideration of potential procompetitive effects.

Judge Brown limited the preliminary injunction’s application to the plaintiffs, denying a nationwide injunction. While the U.S. Chamber of Commerce claimed to represent all its members, the court found this insufficiently briefed. Consequently, the FTC’s rule still applies to everyone else…

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