22 Aug FTC Non-Compete Ban Is Dead, but Non-Competes In Maryland Still Limited
On Tuesday, a Federal Judge in Texas issued a nationwide injunction preventing the enforcement of the Federal Trade Commission’s Regulation that would have banned nearly all non-compete agreements or non-compete clauses in contracts in the United States. The regulation was set to take effect on September 4, 2024.
The court’s ruling breaks into three general parts:
Exceeding Statutory Authority
The court found that the FTC lacked statutory authority to create substantive rules regarding non-compete agreements. The FTC based its rulemaking on sections of the Federal Trade Commission Act (FTC Act) that the court found did not grant the Commission the power to regulate non-compete agreements broadly. Specifically, the Court focused on Section 6(g) of the FTC Act, which allows the FTC to “make rules and regulations for the purpose of carrying out the provisions of this subchapter,” but does not explicitly authorize substantive rulemaking on unfair methods of competition. After passing legislation in 1975, Congress had limited the FTC rulemaking power specifically related to unfair or deceptive acts or practices, not unfair methods of competition. The court emphasized that Congress would need to explicitly grant such broad rulemaking authority if it intended for the FTC to have it.
Arbitrary and Capricious Action
The court also found that the FTC’s Non-Compete Rule was arbitrary and capricious. The rule was deemed overbroad, imposing a categorical ban on non-compete agreements without sufficient justification in the record. The court criticized the FTC for not adequately considering alternatives or the economic impacts of such a sweeping regulation, which ignored the positive aspects and legitimate uses of non-compete agreements in various industries. Several outside groups filed amicus (friend of the court) briefs that noted, among many other matters, that the FTC regulation would invalidate millions of existing contracts.
Legal Precedents and Judicial Review
The court underscored the role of judicial review in curbing administrative overreach, reiterating that agencies like the FTC must operate within the clear bounds of the authority granted by Congress. The ruling emphasized that without explicit statutory authority, the FTC’s actions attempting to regulate non-compete agreements through this rule were unlawful. The Loper Bright case recently issued by the U.S. Supreme Court that ended the so-called Chevron deference played only a minor role in the case. The court cited dozens of precedents focused more on the FTC Act and interpretations of the FTC Act without relying specifically on Loper Bright.
When the regulation was first proposed, I did not think it would survive a court challenge. I was surprised by earlier court rulings that limited the preliminary injunction to just the parties to the lawsuit, but looking back, that was a reasonable step. The Texas federal judge allowed a full hearing on the merits, with a well-developed record that would be necessary for an appeal.
I have not seen an official statement from the Federal Trade Commission about an appeal.
NON-COMPETES IN MARYLAND STILL EXIST
Lest we think employers can run out and start putting all employees on a non-compete agreement, state laws banning non-competes still exist because they have been instituted legislatively. The District of Columbia has effectively banned the practice for all but the most senior C-Suite level employees.
In Maryland, employees who earn less than 150 percent of the minimum wage cannot be subject to a non-compete agreement. So, employees earning $22.50 per hour ($46,800 per year) or less are covered by this law.
Additionally, healthcare workers licensed under the Maryland Health Occupations Code who provide direct patient care and veterinarians and veterinary technicians are covered by a new law that bans non-competes for providers earning less than $350,000 annually. The new law went into effect on June 1, 2024. There are significant time and geography restrictions on potential non-competes for healthcare workers and veterinarians/Techs who earn more than $350,000 per year. The public policy implication for these employees is pretty clear: the State wants to ensure that healthcare workers can serve the public without many real restrictions.
Non-compete agreements must be carefully drafted to ensure they do not exceed reasonable limits or violate the growing number of limitations on their use. Contact me if you want to discuss non-compete agreements or their close kin non-solicitation agreements.