Judge Blocks FTC Ban on Non-Competes

In May 2024, the Federal Trade Commission (FTC) issued a new rule banning virtually all non-competition agreements. Several lawsuits were quickly filed challenging the rule. On August 20, 2024, the U.S. District Court for the Northern District of Texas issued an order preventing the non-compete rule from going into effect nationwide. While this is good news for employers, they should discuss this development with legal counsel to determine what steps, if any, they should take now.

What Does the FTC Rule Say About Non-Competes?

As discussed in a prior blog post, the FTC prohibited new non-competition agreements executed after the effective date of the rule with limited exceptions for nonprofits, certain senior executives, franchisor-franchisee agreements, and sellers of a business.

Pre-existing non-competition agreements would have become unenforceable after the rule went into effect, except for those groups specifically exempted from the rule.

How Did the Judge Rule?

The plaintiffs sued in the U.S. District Court for the Northern District of Texas to stop the FTC rule from taking effect. After temporarily enjoining enforcement of the rule in July, the Court issued a final decision on August 20, 2024. 

In the ruling, the judge blocked enforcement of the rule, holding that the FTC exceeded its statutory authority in enacting the ban because it lacked substantive rulemaking power with respect to unfair methods of competition. 

Further, the judge found that the rule was arbitrary and capricious because it was unreasonably overbroad without a reasonable explanation. The Court stated that the FTC failed to present evidence justifying its action. Its studies showing the adverse economic effects of non-competes were insufficient. It did not consider the positive benefits of non-competes or less disruptive alternatives. Instead, the FTC imposed a blanket ban rather than targeting specific, harmful non-competes. As a result, the Court set aside the rule as unlawful, prohibiting it from taking effect.

Importantly, the decision applies nationally, not just to the parties in the case or to cases in the Texas district. 

What Steps Should Employers Take Next?

As of now, the non-compete rule will not go into effect on September 4. The FTC is expected to appeal to the Fifth Circuit Court of Appeals, and the matter may ultimately be decided by the U.S. Supreme Court. 

In the meantime, many states continue to place restrictions on non-competes. As a result, employers should consult an experienced employment lawyer about drafting carefully tailored non-competes and/or using alternatives to non-competes such as non-disclosure agreements (NDAs), non-solicitation agreements, and other options to protect their business. 

Please feel free to contact any of our attorneys if you have questions about the decision or need assistance with employment agreements, NDAs, or other guidance.

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