On August 20, 2024, a federal district court in Texas struck down the Federal Trade Commission’s sweeping ban on non-compete agreements. This nationwide injunction is a comfort to many employers just weeks before the FTC’s final rule was to go into effect on September 4th, 2024.
If left alone, the FTC final rule would have invalidated millions of employment contracts. Although the FTC’s final rule carved out narrow exceptions, such as for pre-existing non-compete agreements for highly compensated senior executives, it would have invalidated the vast majority of pre-existing non-compete agreements and prevented employers from entering into new non-compete agreements. Further, the final rule would have required employers to provide notice to current and former employees that their noncompete clauses are no longer in effect.
Unsurprisingly, the FTC’s rule was met with much resistance from employers as well as litigation in several states all culminating in Judge Ada Brown’s August 20th ruling in the Northern District of Texas. A Texas employer, the United States Chamber of Commerce, and others sued the FTC over its rule. Initially, the court blocked the rule only as applied to the specific parties before the court. However, on August 20th, the court issued the nation-wide injunction against the FTC final rule. While it is anticipated that the FTC will likely appeal the decision, such an appeal would have to take place in the conservative 5th Circuit Court of Appeals and may prove unsuccessful.
The Texas decision follows recent Supreme Court precedent which no longer gives as much deference to agencies like the FTC and subjects them to a higher level of scrutiny. Accordingly, the district court determined that the FTC’s broad “one-size-fits-all approach with no end date” lacked statutory authority.
What does the nationwide injunction mean for employers? The FTC is currently enjoined from implementing the final rule prohibiting non-compete agreements on a national level. However, non-competes will remain subject to a growing number of state law limitations and requirements. Accordingly, it is essential for employers to ensure their non-compete agreements are tailored to meet their specific state’s laws and court precedent.
The Labor and Employment attorneys at Coolidge Wall will be monitoring the situation and providing updates as they develop.
