As expected, a legal battle is playing out over the U.S. Federal Trade Commission’s near-total ban on noncompete agreements, and a federal judge has granted a preliminary injunction delaying implementation of the ban while the court reviews the merits of the case.

The United States District Court for the Northern District Court of Texas Dallas Division granted a preliminary injunction blocking the ban from taking effect, with Judge Ada Brown saying the plaintiffs, the U.S. Chamber of Commerce and a Texas tax firm, “have met their burden of showing irreparable harm in the absence of injunctive relief.”

Furthermore, she ruled, “…it is evident that if the requested injunctive relief is not granted, the injury to both Plaintiffs and the public interest would be great. Granting the preliminary injunction serves the public interest by maintaining the status quo and preventing the substantial economic impact of the Rule, while simultaneously inflicting no harm on the FTC.”

The court declined to issue a nationwide injunction and limited the scope of the injunction to the parties involved in the case. The court’s final decision, however, may broaden the scope of relief and vacate the rule entirely. The court is expected to issue a decision on the merits by August 30.

The FTC maintains that noncompete agreements should be banned because they unfairly block employees from switching jobs. Business groups, however, state the agreements are critical to protecting their proprietary information and intellectual property. The FTC’s rule was initially scheduled to take effect on September 4, 2024, but that could change depending on the outcome of this litigation.

As defined in the final rule, a “non-compete clause” is any term or condition that prohibits a worker from seeking or accepting work with a different employer after they leave their current employer. That definition will capture virtually all traditional non-compete agreements between employers and employees, affecting nearly 30 million employment contracts.

The FTC’s final rule made an exception for existing non-compete agreements with senior executives, defined as leadership-level employees earning more than $151,164 annually, and, in policy-making positions. Harris Beach previously took an in-depth look at what the FTC final rule on noncompete agreements entails.

What Businesses Should Do with Their Noncompete Agreements

While the courts sort through the federal ban, numerous states, including New York, are still actively considering their own prohibitions on non-compete agreements. Here’s what Harris Beach recommends employers do as the litigation plays out in court:

First: looking strictly at the Final Rule, businesses with any interest in securing a non-compete agreement with key leaders should act fast, and, consider any compensation adjustments needed to come within the Rule’s exception for “senior executives.”

Second: businesses may consider modifying their existing employment agreements to bring them into best-as-possible compliance with regard to non-solicitation, confidentiality, and trade secret matters.

Third: businesses should review all of their restrictive covenant agreements and prepare for a potential “sea-change” in the world of non-competes, irrespective of whatever happens with the FTC’s Rule. State and local governments, including New York State, continue to draft their own non-compete prohibitions. Regardless of the final disposition of the FTC’s Rule, the regulatory and legislative oversight of non-compete agreements may have finally reached a tipping point. Consulting with employment counsel is critical to protect core interests.