The Federal Trade Commission’s (FTC) nationwide ban on post-employment noncompetition agreements is no more following a Northern District of Texas judge’s ruling imposing a nationwide permanent injunction. Although a long and somewhat predictable road, Eversheds Sutherland’s Labor and Employment team has been following developments related to the FTC’s noncompete ban closely. As described in Eversheds Sutherland’s January 6, 2023, Legal Alert, the FTC’s move built upon the Biden Administrations July 9, 2021, Executive Order on Promoting Competition in the American Economy, encouraging the FTC to tackle the issue by limiting or banning non-competition agreements. The FTC was not the only agency to take steps to further this Executive Order. On June 1, 2023, Eversheds Sutherland published a separate Legal Alert summarizing the National Labor Relations Board (NLRB) General Counsel’s May 30, 2023 Memorandum to Regional Directors indicating that the “proffer, maintenance, and enforcement of [employee non-compete] agreements violate Section 8(a)(1) of the National Labor Relations Act (NLRA)” in most circumstances. On April 23, 2024, after the FTC issued its Final Rule, Eversheds Sutherland published a separate Legal Alert describing the FTC’s alterations to the Proposed Rule following the comment period.

To recap, the FTC’s Final Rule banning post-employment noncompete provisions in employment agreements sought to impose significant changes to the states’ ability to regulate restrictive covenant agreements between employers and workers. Broadly, the FTC’s Final Rule banned new noncompetes with all workers, including Senior Executives after September 4, 2024. It also applied retroactively and required employers to inform workers with noncompete agreements, including former employees, that the agreements were void and no longer enforceable. Although some carve-outs were included (e.g. prior noncompetes with “Senior Executives” and noncompetes tied to the sale of a business) the FTC’s Final Rule largely trampled on an area of law traditionally left to the individual states to regulate.

Multiple lawsuits challenging the FTC’s Final Rule in Texas, Pennsylvania, and Florida ensued with mixed results. For instance, on July 3, 2024, Judge Brown, of the Northern District of Texas, issued a preliminary injunction preventing the FTC from enforcing its noncompete ban, but only as to the actual parties in that case. On July 24, 2024, an Eastern District of Pennsylvania judge denied a similar preliminary injunction bid, setting the stage for a potential circuit split. On August 14, 2024, a Middle District of Florida judge followed the Texas judge’s lead and issued a preliminary injunction enjoining the FTC’s noncompete ban as to the parties in that case.

Judge Brown made good on the July 3, 2024 ruling, which indicated that the parties should expect a final ruling prior to the impending September 4, 2024 enforcement date. On August 20, 2024, the Court granted summary judgment in favor of the plaintiffs holding that the Final Rule imposing a nationwide ban on noncompete agreements exceeded the FTC’s statutory authority and was arbitrary and capricious. The Court acknowledged that while the FTC has “some authority to promulgate rules to preclude unfair methods of competition . . . the FTC lacks the authority to create substantive rules” like the noncompete ban. Moreover, the Court held that the FTC’s Final Rule was “unreasonably overbroad without a reasonable explanation.”

Judge Brown’s permanent injunction means that the FTC’s noncompete rule is unenforceable. Therefore, employers that have been preparing to take actions to comply with the rule starting September 4, 2024, can take a tactical pause. The FTC, however, has already signaled that it is likely to appeal Judge Brown’s decision. Perhaps more importantly, the FTC also commented that, even in the absence of an agency rule banning noncompetes, it would still assess the need to initiate case-by-case internal enforcement actions against employers who misuse noncompete agreements. The FTC is referring to actions it has taken in the background while the litigation over the noncompete ban has played out in the courts. For instance, on January 4, 2023 (just days before unveiling the Proposed Rule banning noncompetes), the FTC announced the result of its own internal agency action against three employers and two individuals who the FTC alleged misused noncompetes to harm competition. The FTC announced a separate order stemming from its internal enforcement efforts on March 15, 2023, touting that it was the “fourth time this year the agency has taken action against companies that use harmful noncompetes.”

Clearly the FTC is willing to take matters into its own hands whether its nationwide noncompete ban survives, and employers should not miss the forest for the trees in that regard. Restrictive covenant laws are highly specific from one state to the next and require a case-by-case analysis. Employers should actively monitor developments in this area of the law and avoid taking a one-size fits all approach to the use of restrictive covenants in employment agreements, especially employers with employees in multiple states.

To say that the post-employment noncompete landscape has been hostile in recent months would be an understatement. For instance, in addition to the agency attacks on noncompetes, some states have attempted to (New York) or successfully (Minnesota) implemented new legislation banning or limiting the use of noncompete agreements. Even with Judge Brown’s injunction, employers will need to consider the potential for further action from the FTC and the NLRB as well as possible legislative changes at the state level that will present challenges for enforcing non-competes and other restrictive covenants. Employers should take this opportunity to review internal practices, ensure that existing documents (including restrictive covenant agreements, confidentiality agreements and related IP protections) reflect the current state of the rules and take appropriate steps to otherwise protect company interests (e.g. confidential information).

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