FTC Pulls Appeals, Puts Nail in Coffin of 2024 Noncompete Rule

The Federal Trade Commission (FTC) on Friday, Sept. 5, ceremoniously moved to vacate its April 2024 final rule banning noncompete agreements for most American employers by dismissing its appeals in two related U.S. district court cases.

In stepping away from its Oct. 18, 2024, challenges to two pro-employer verdicts — the Aug. 14, 2024, decision in Properties of the Villages, Inc. v. Federal Trade Commission (11th District) and the Aug. 20, 2024, decision in Ryan LLC v. Federal Trade Commission (Fifth District) — the agency officially “acceded to the vacatur,” meaning it consented with the courts’ prior judgment (in their purview, the FTC lacked clear authorization from Congress to create and enact the rule). In doing so, the noncompete rule is “treated as though it never occurred.”

The action in many respects closes the FTC’s era under President Joe Biden and reverses what was seen by business and labor observers as the agency’s most visible and impactful action during that administration.

Dissecting the Vote and the Commission

At the time of the vote to rescind the appeals, the FTC had four active commissioners (three Republicans and one Democrat) on the five-seat panel, and the appeal-vote outcome (3-1) was purely on party lines.

The agency has been shorthanded since March 18, when Trump fired Biden appointees Rebecca Kelly Slaughter and Alvaro Bedoya. Bedoya chose to instead resign, but Slaughter filed a lawsuit against the firing, arguing it was illegal. On Monday, Sept. 9, the U.S. Supreme Court temporarily paused a lower-court order that required Slaughter’s reinstatement — allowing Trump, for now, to remove her. The FTC website quickly updated its commissioner roster later that day, including Slaughter on the list of “former chairmen, chairwomen and commissioners.”

Following the Sept. 5 vote, chair Andrew Ferguson issued a statement, joined by colleague Melissa Holyoak with concurrence from Mark Meador, that railed against the April 2024 noncompete rule and praised the court decisions that worked to invalidate it.

“[The final rule] preempted the laws of all 50 states, and actively displaced hundreds of existing laws across 46 states,” Ferguson wrote. “[It] purported to render categorically unlawful a species of contract that has been lawful since the 18th century by reimagining a single clause tucked away in an ancillary provision of a century-old statute. Little more need be said about the legal viability of the rule. The rule’s illegality was patently obvious. Commissioner Holyoak and I warned our Democrat colleagues at great length that the rule was unlawful six ways from Sunday, that the rule would never survive judicial review, and that the resources sunk into the rule’s promulgation and defense would be wasted. We were ignored. ... And, as predicted, the courts swiftly invalidated the rule.”

In her dissenting statement, Slaughter wrote, “The most important problem here is the substance — the duly promulgated rule, and the millions of American workers and businesses it protects deserve vigorous defense in court. … Suffice it to say that the record in the FTC’s own rulemaking proceeding made clear that noncompetes not only present barriers to worker mobility but also suppress wages, prevent new business formation and slow innovation. They even deprive consumers of the better products and better prices we expect from competitive markets. And if the workers in your field have noncompetes — even if you don’t — the evidence shows your wages get suppressed too, even for workers who are not subject to a noncompete themselves.”

She also commented that the noncompete issue, procedurally, is not over at the federal level.

“If the agency insists on unwinding this key worker protection, it must follow the legal process of notice and comment set forth by the Administrative Procedure Act,” Slaughter wrote. “The law does not permit the agency to void this popular rule under cover of darkness by simply withdrawing from litigations. The law requires that we hear from the American people. In absence of that legally required process, the action the commission takes today should not hamper the agency in the future.”

In assembling its 2024 rule, the FTC had estimated that approximately 30 million people, or 1 in 5 American workers, from minimum-wage earners to CEOs, are bound by noncompete agreements.

The View on Noncompetes Going Forward

While the FTC will not challenge the precedents levied by the courts, the Republican-led agency said it will uphold its mission of “protecting the public from deceptive or unfair business practices and from unfair methods of competition through law enforcement, advocacy, research and education.”

While Ferguson, as chair, opposes a full federal ban on noncompete agreements, he has acknowledged that many noncompetes are “pernicious” and can violate existing antitrust laws. Since Trump took office for his second term, Ferguson has prioritized using these antitrust laws to prosecute noncompetes that are “so pernicious and so onerous” as to make them “anti-competitive” on a case-by-case basis. He has stated he supports a more limited, enforcement-focused approach that targets specific instances of abuse rather than a broad prohibition.

Toward the latter, on Thursday, Sept. 4, the FTC filed an enforcement action and simultaneous proposed settlement against a pet cremation company for abuse of employer-employee post-termination noncompetes as an anticompetitive practice in violation of Section 5 of the Federal Trade Commission Act.

“[Gateway Pet Memorial Services] knowingly wielded noncompete agreements to erect barriers in circumstances where it faced what it perceived to be tougher competition in an effort to curtail worker mobility and workers’ ability to negotiate better employment terms,” Ferguson noted in his Sept. 5 “acceding vacatur” statement.

The chair is also a proponent of letting states take the lead on noncompete legislation.

“Not only have noncompete agreements been around, and been regulated, for more than half a millennium, they have been, until today, the province almost exclusively of state legislative authority,” he wrote in his April 2024 dissent to the final rule. “And, the states have vigorously exercised that authority to take a variety of different regulatory approaches. All 50 states regulate noncompete agreements extensively. The vast majority retain the common-law reasonableness approach, either codified in statute or elaborated in judicial decisions. ... Only four states have banned noncompete agreements outright.”

Guidance for Employers

So, how might the employers respond to the recent FTC actions and stances?

In a post on its website, law firm White & Case LLP stated, “The FTC’s actions against Gateway demonstrate that employers that use noncompete agreements across the organization — regardless of the employee’s title, compensation level or ability to cause harm to the employer — may be susceptible to enforcement action. Such employers should consider evaluating their practices (even if such practices are compliant with applicable state and local laws). Adopting a more tailored approach to the use of noncompetes could potentially stave off FTC investigation or action, and the myriad of challenges that would bring, ranging from facing a potential companywide investigation (which could include document collections and depositions), to reputational harm, and, if necessary, implementing a companywide burdensome consent order and resulting compliance requirements.”

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