On August 20, a federal judge in the Northern District of Texas ruled that the Federal Trade Commission (“FTC”) cannot enforce its rule banning the use of non-compete agreements for most workers. Significantly, the court extended its ruling nationwide, effectively blocking the FTC’s non-compete rule entirely.  Previously, the same court had limited a preliminary injunction to just the parties in the case.  Employers were thus uncertain as to whether the rule would go into effect on September 4 as planned.

Plaintiffs in the Northern District of Texas case, including the U.S. Chamber of Commerce, argued that the FTC exceeded its authority in creating a non-compete prohibition that would have retroactively invalidated many existing contracts between employers and workers. The court agreed, ruling both that the FTC “lacks statutory authority to promulgate” its non-compete rule, and that the non-compete rule itself was “arbitrary and capricious” and “unreasonably overbroad without a reasonable explanation.”  Specifically, the court held the FTC could not expand its authority to issue procedural rules regarding unfair methods of competition to making substantive rules, such as the non-compete rule. The court also concluded that the FTC had not sufficiently justified the reasoning behind its non-compete prohibition, ignored the positive benefits of non-compete agreements, and failed to consider other less sweeping alternatives, like targeting specific, harmful non-competes.

The non-compete rule was scheduled to take effect on September 4, 2024, but its implementation will now be delayed indefinitely, pending an anticipated appeal.  Until further court rulings on this issue, employers may continue to enter into non-competes with their workers in accordance with state law.  Employers also do not need to issue notice to employees and former employees that their non-compete will not be enforced, as would otherwise have been required by September 4 pursuant to the FTC’s rule.  

The case in Texas is one of three lawsuits that have been filed in challenge to the FTC’s non-compete rule.  Two others are pending in Florida and Pennsylvania, neither of which have reached a final determination on the merits.

Of course, this ruling does not impact existing state laws that restrict the use of non-compete agreements, so it is important to consult with employment counsel to remain compliant with changing state-by-state requirements with respect to employee restrictive covenants.