Competition for All? The FTC’s Ban on Non-Competes and the More Effective Route in Promoting Competition

Authors

• Aniqah Nashiat

Document Type

Note

Abstract

(Excerpt)

Employment contracts have historically included non-compete agreements, which are restrictive covenants forbidding employees from working “for competitors of their former employer for a certain period of time and over a defined geographic area.” American jurisprudence has always left enforcement of these non-competes to states. In the federal government, Congress has never successfully passed legislation on the per se illegality of non-competes. Instead, President Joe Biden signed an executive order in 2021 aimed at promoting the interests of American workers because companies requiring them to sign non-competes restricted their ability to change jobs. Biden explained that strengthening antitrust laws would prevent “the excessive concentration of industr[ies], the abuses of market power,” and the harmful effects to labor markets. As a result, the Federal Trade Commission (“FTC” or “the Commission”) issued its Non-Compete Rule (“the Rule”) on April 23, 2024, which prohibited employers from enforcing practically all existing and prospective non-competes against their workers. The Rule was set to go into effect four months later. It would have been the first federal regulation on non-competes, effectively preempting the well-established laws of at least forty-six states.

The Commission enacted the Rule pursuant to Section 5 and 6(g) of the Federal Trade Commission Act (“the Act”), which together, according to the FTC, empower it to promulgate rules preventing unfair methods of competition. The Rule provides that employers entering into non-competes with their workers is a violation of Section 5 of the Act because it is an unfair method of competition. The Rule differentiates between “worker” and “senior executive.” While employers may not subject workers to existing and prospective non-competes under the Rule, employers may continue to subject senior executives to existing non-competes. Additionally, the FTC carved out exemptions for non-competes entered into pursuant to the sale of businesses, non-competes enforced from existing causes of actions, and non-competes entered into pursuant to an employer’s good faith belief that the Rule was inapplicable.

Given the gravity of the first federal regulation on non-competes, employers quickly took legal action. On the same day the FTC voted to finalize the Rule, Ryan, LLC (“Ryan”) and other plaintiff-intervenors commenced an action in a Texas federal district court claiming that the Rule exceeded the FTC’s statutory authority, was arbitrary and capricious, and was unconstitutional. The FTC responded that Congress expressly authorized it to promulgate rules that prevent unfair methods of competition and that the Rule was not arbitrary and capricious because of the Commission’s “exhaustive study of non-competes.” However, the Ryan court held that the Rule did exceed the FTC’s statutory authority and that it was arbitrary and capricious. It ordered that the Rule could not be enforced or take effect. On September 5, 2025, President Trump’s FTC dismissed its Fifth Circuit appeal in Ryan and filed to accede to vacatur of the Rule, meaning that the Ryan court’s order remains in place and the Rule will not be in effect.

This Note argues that the FTC’s attempt to combat the negative impacts of non-competes through the Rule was unnecessarily broad. This Note offers a more practical, narrower approach in reaching the FTC’s goals of promoting competition and strengthening antitrust law, while still falling within the FTC’s statutory authority as to not be invalidated under the scrutiny of judicial review if the Commision were to address non-competes through rulemaking once again. Part I offers background on the emergence of the FTC and its powers, antitrust and non-compete laws, and how American jurisprudence has dealt with both laws. Part II surveils state law approaches favoring and disfavoring non-competes, as all American jurisprudence on non-competes up until the FTC’s involvement has been state governed. Part III discusses the FTC’s goals and purposes in promulgating the Rule and why it disfavors non-competes. Finally, Part IV argues that the Rule is overbroad in reaching the FTC’s goal of promoting competition. Part IV suggests narrowing the Rule to be more aligned with other sections of the Act or, alternatively, current state law limitations.