Important Update on Non-Compete Agreements

Texas District Court Judge Blocks FTC’s Rule Banning Most Noncompete Agreements

from Taking Effect September 4, 2024

Employers will no longer need to redraft Employee Agreements and notify employees, both current and former.

On August 20, 2024, U.S. District Court for the Northern District of Texas, Dallas Division, blocked the Federal Trade Commission’s (“FTC”) “Non-Compete Rule” (“Final Rule”) from going into effect September 4, 2024.

In January 2023, the FTC proposed the Final Rule, which was adopted on April 23, 2024, in a 3-2 vote. The Final Rule would “prohibit employers from entering into non-compete clauses with workers starting on the rule’s compliance date” and “require employers to rescind exiting non-compete clauses no later than the rule’s compliance date” of September 4, 2024. The FTC determined that noncompete agreements were an unfair method of competition in violation of Section 5 of the FTC Act.

On April 23, 2024, Ryan, LLC brought suit against the FTC challenging the Final Rule on the grounds it was unlawful as: (1) the FTC acted without statutory authority; (2) the Final Rule was the product of an unconstitutional exercise of power; and (3) the FTC’s acts, findings and conclusions were arbitrary and capricious. On July 3, 2024, the court granted the plaintiffs’ Motion for Stay of Effective Date and Preliminary Injunction but limited the scope of its order to the named plaintiffs only.[1] The court’s order granting the Preliminary Injunction suggested that she was likely to block the Final Rule, however based on its limited scope, it was unclear whether such ban would apply nationwide.

After hearing Plaintiffs’ Motion for Summary Judgment and Defendant’s Cross-Motion for Summary Judgment, Judge Brown determined that the FTC lacked substantive rulemaking authority pursuant to the FTC Act to promulgate the Final Rule, and that it was arbitrary and capricious. The court rejected the FTC’s argument that should the Final Rule be struck down, such relief should be limited to the named plaintiffs, holding that the APA does not contemplate party-specific relief. Accordingly, the court held the Final Rule was unlawful and set it aside, stating it “shall not be enforced or otherwise take effect on its effective date of September 4, 2024, or thereafter.”

Key Takeaways

The FTC’s Final Rule banning noncompete agreements will no longer take effect September 4, 2024. Employers will no longer need to redraft Employee Agreements and notify employees, both current and former. However, employers should continue to evaluate their restrictive covenants to ensure they are narrowly tailored to protect their business’s actual interests.

FTC Spokesperson, Victoria Graham, stated Tuesday that the FTC is seriously considering a potential appeal, and the ruling does not prevent the FTC from addressing noncompete agreements on a case-by-case basis.

Review the complete order here. https://www.documentcloud.org/documents/25052724-ryan-v-ftc-opinion

Our employment attorneys, Erick Drlicka, Jennifer Shoaf Richardson, and Rebecca Radd are available to consult if you have any questions particular to your business. Please schedule a call by emailing your counsel or calling (850) 444-3854.

[1] On May 9, 2024, the Chambers of Commerce of the Unites States of America, Business Roundtable, Texas Association of Business, and Longview Chamber of Commerce all moved to intervene in the suit which was granted by the court the following day.