FTC Rule Invalidating Non-Compete Agreements Struck Down by Texas Court

On August 20, 2024, the U.S. District Court for the Northern District of Texas held unlawful and set aside the Federal Trade Commission’s (FTC) final rule prohibiting non-competition agreements with workers.  The ruling applies to employers nationwide, although its likely to be appealed by the FTC.

The Background

The FTC published its final rule regarding non-competes on May 7, 2024. With limited exceptions, the rule would have effectively banned all non-compete agreements—and provisions that functioned as non-competes—between businesses and “workers” as “unfair method[s] of competition.” It also would have required companies to refrain from enforcing most existing non-compete agreements and notify “workers” that any non-compete obligations were now unenforceable. The rule had been scheduled to take effect on September 4, 2024.

On July 3, 2024, the U.S. District Court for the Northern District of Texas had granted a limited preliminary injunction staying enforcement of the FTC’s final rule prohibiting non-compete clauses, but only as to the parties in the case, pending a final ruling on the merits.

The Latest Developments

On August 20, 2024, the court issued a significantly broader ruling, finding that in issuing the non-compete rule, the FTC had exceeded its rulemaking authority with respect to unfair methods of competition.

“Having concluded that (i) the FTC promulgated the Non-Compete Rule in excess of its statutory authority, and (ii) the Rule is arbitrary and capricious, the Court must “hold unlawful” and “set aside” the FTC’s Rule as required under [Section] 706(2)…. As the [Fifth Circuit] put in a couple of recent cases, setting aside an agency action under [Section] 706 has a “nationwide effect,” is not “party restricted,” and “affects persons in all judicial districts equally.” [citations omitted] Thus, the Court hereby holds unlawful and sets aside the Rule.”

What Now?

Businesses that were planning to comply with the non-compete rule by rewriting agreements and preparing a notice to current and former employees regarding the rule’s effects can now put those efforts aside. The non-compete rule will no longer take effect on September 4, 2024.

The FTC will certainly appeal the U.S. district court’s ruling. It now appears doubtful that the non-compete rule will ever become effective in its current form, but it will probably be years before the issue is finally resolved. While the FTC rule is likely in the rear-view mirror, efforts to ban non-compete provisions will likely continue on the state and local level. Business owners should maintain efforts to update and implement their restrictive covenant programs so that each covenant is narrowly tailored to protect their actual business needs.