FTC Rule On Non-Competes Is Bruised But Not Yet Beaten As FTC Appeals, While NLRB Continues To Challenge Non-Competes

In April 2024, the FTC issued a Rule declaring invalid most existing non-compete agreements and prohibiting most employers from entering into new non-compete agreements after September 3, 2024, with few exceptions. Three lawsuits were filed challenging the FTC Rule - - two in Texas and one in Philadelphia. The Philadelphia lawsuit resulted in the court’s denying a motion to stay enforcement of the Rule on July 23, 2024. Judge Hodge then set a deadline of September 20, 2024 for the plaintiff, ATS Tree Service, to file a motion for summary judgment, a deadline that was extended twice. On October 4, ATS withdrew its Complaint, thereby ending this challenge and any right to appeal.

On May 9, 2024, the two Texas cases were consolidated and proceeded as Ryan v. FTC. On July 3, 2024, Judge Brown granted the plaintiff’s motion to stay the effectiveness of the FTC Rule temporarily, issued a preliminary injunction, and promised a decision on the merits before the Rule’s September 4 effective date. Accordingly, on August 20, 2024, Judge Brown issued her final decision setting aside the FTC Rule and holding that the Rule “shall not be enforced or otherwise take effect on September 4, 2024, or thereafter.” The court reasoned that the FTC acted in excess of its statutory authority and the Rule was arbitrary and capricious, and ruled that the decision applied nationwide. The court characterized the Rule as a “categorical ban” that had no analog in any state non-compete law and for which “the FTC provides no evidence or reasoned basis.” The court also criticized the FTC for failing to “consider the positive benefits of non-compete agreements,” failing to address alternatives to the Rule, and failing to conduct the required analysis of less disruptive alternatives. Judge Brown relied in part on the SCOTUS decision in Loper Bright Enterprises in finding that the FTC violated the Administrative Procedure Act by issuing the Rule.

But the legal challenge has not ended. On October 18, 2024, the FTC appealed Judge Brown’s decision to the Fifth Circuit Court of Appeals. No decision is expected before spring 2025, but Judge Brown has a 68% affirmance rate.

Meanwhile, the NLRB has been active in the area of non-compete agreements entered into with statutory employees - - that is, employees who are not managers, supervisors, owners or confidential employees. The Board’s 2023 Stericycle decision, which held that employer workplace policies will be subject to higher scrutiny to determine whether the policy chills employees’ exercise of Section 7 rights to engage in concerted, protected activity. The Stericycle decision was invoked by the Board’s Division of Advice in an unfair labor practice charge brought against Promotional Concepts. In December 2023, the Division of Advice determined that the employer’s non-compete/non-solicitation agreement was lawful under Stericycle because the agreement did not prevent the “employee from accessing other employment opportunities.” Then in June 2024, a Board ALJ found that J.O. Mory, Inc. violated the NLRA by requiring employees to agree to a non-compete agreement that would continue for 12 months past employment termination. The Judge found that the non-compete violated Stericycle because it “would deter a reasonable employee from engaging in protected activity by barring employees from directly or indirectly . . . being employed by, or becoming interested in any enterprise that is ‘similar or competitive’ to the employer’s business.” Finally, on October 7, the NLRB’s General Counsel issued a 17-page memo detailing the remedies the NLRB will seek against an employer that maintains and/or enforces an unlawful non-compete.

Although the FTC’s efforts to expand its jurisdiction to include non-competes have met with mixed results, it is prudent to be aware of the NLRB’s enforcement policy in this area.

If you have any questions regarding the enforceability of your business’s non-compete agreements, please contact Patrick W. McGovern, Esq., a Partner in our Labor Law Practice Group, at 973.535.7129 or via email here, or Brigette N. Eagan, Esq., a Partner in our Human Resources Law and Compliance Practice Group, at 973.535.7114 or via email here.