On August 20, 2024, the U.S. District for the Northern District of Texas issued a nationwide injunction setting aside the Federal Trade Commission’s (FTC) final rule banning non-compete agreements. The rule—which was set to go into effect on September 4, 2024—would have effectively banned almost all non-compete agreements, requiring companies to refrain from enforcing them and to notify their employees that such agreements were unenforceable.
The court determined that the FTC had exceeded its statutory authority in promulgating the rule. Additionally, it found the rule to be arbitrary and capricious, citing that it was unreasonably broad and grounded in flawed evidence.
This decision comes after a coalition of states, led by Texas, challenged the FTC’s authority to impose such a rule. The court’s ruling effectively halts the nationwide application of the ban while the legal challenges are resolved.
Implications for Employers
Here are the key immediate implications for employers:
- Employers who were preparing to comply with the FTC’s final rule by updating template agreements and notifying current and former employees about the rule’s impact no longer need to continue those actions; and
- As of now, we are once again back to the status quo. Employers can continue to use and enforce non-compete agreements, so long as such agreements remain in compliance with applicable state law.
Looking Ahead
The FTC will likely appeal the district court’s decision to the Fifth Circuit. The agency may also continue to pursue related litigation in federal courts in Pennsylvania and Florida.
However, the rule is unlikely to receive a favorable reception in the wake of the U.S. Supreme Court’s recent decision in Loper Bright, which overturned the Chevron doctrine. This doctrine had previously required that courts defer to an agency’s interpretation when the statute granting it authority is ambiguous. The Northern District of Texas’s decision notably relied on Loper Bright to conclude that the FTC had exceeded its statutory authority. Consequently, the FTC rule is expected to undergo even more rigorous scrutiny than it would have prior to Loper Bright.
Regardless of what happens to the federal rule, state-level lawmakers and enforcers continue to scrutinize non-competes. Several states already substantially limit the use of worker non-compete agreements, while others are considering new restrictions on non-competes. Employers should be aware that even if the FTC rule is permanently overturned, state legislatures and enforcement bodies may likely take on this issue.
In any case, employers and employees alike should stay abreast of further developments and consult with legal professionals to navigate these complex issues. As always, proactive planning and informed decision-making are key to managing the implications of such significant legal changes.
