Texas court bars nationwide enforcement of FTC rule banning non-compete agreements

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Texas court bars nationwide enforcement of FTC rule banning non-compete agreements

21 August 2024

On August 20, 2024 a Texas federal judge blocked, on a nationwide basis, enforcement of the Federal Trade Commission (FTC)’s rule banning non-compete agreements (the “Non-Compete Rule”),1 which had been slated to take effect on September 4, 2024. The court found that the Non-Compete Rule, which would have banned nearly all non-competes throughout the United States, exceeded the FTC’s statutory authority under the FTC Act, and was arbitrary and capricious. As a result of this decision, the Non-Compete Rule will not take effect on September 4, and as such, employers are not prohibited by the Non-Compete Rule from entering into new non-competes, and need not take steps by September 4 to comply with its requirement of sending out notices invalidating existing non-competes. The FTC may appeal this decision to the U.S. Court of Appeals for the Fifth Circuit, but any appellate process will likely take months or years to resolve.

Texas Court’s decision bars enforcement of the Non-Compete Rule nationwide

On April 23, 2024, the FTC voted to publish the Non-Compete Rule. If that rule took effect, it would have banned the use of non-compete clauses nationwide, classifying such clauses as an unfair method of competition under Section 5 of the FTC Act, and employers would have been required, by September 4, 2024, to send out notices informing those subjects to such agreements that they were no longer enforceable. The Non-Compete Rule was challenged in several federal courts. On July 3, 2024, Judge Ada Brown of the United States District Court for the Northern District of Texas, one of the courts hearing a challenge to the Non-Compete Rule, issued a preliminary injunction postponing the September 4, 2024 effective date of the Non-Compete Rule, but only as to plaintiff Ryan, LLC and plaintiff-intervenors, and not on a nationwide basis.

In the most recent decision on August 20, 2024, Judge Brown did not limit relief to specific parties, and instead ordered that the Non-Compete Rule is unenforceable nationwide. The court rejected the FTC’s argument for a more limited remedy, explaining: “As to the FTC’s argument that relief should be limited to the named Plaintiffs—the [Administrative Procedure Act] does not contemplate party-specific relief. As the Fifth Circuit put it in a couple of recent cases, setting aside agency action under [the Administrative Procedure Act] has nationwide effect, is not party-restricted, and affects persons in all judicial districts equally.”2 (quotation marks, citations, and brackets omitted).

This is good news for employers who have been in limbo for months over the Non-Compete Rule. Although the court’s decision may be challenged by the FTC on appeal to the U.S. Court of Appeals for the Fifth Circuit, such an appellate process will likely take months or years to conclude and could ultimately end up before the U.S. Supreme Court.

Authored by Lauren Battaglia, Kevin Burke, Michael DeLarco, George Ingham, Kenneth Kirschner, Tao Leung, Chuck Loughlin, Michael Szlamkowicz, and Jill Ottenberg.