On August 20, 2024, the US District Court for the Northern District of Texas issued a nationwide injunction barring the Federal Trade Commission’s (FTC) Final Rule that bans all noncompete agreements. The court’s findings focused on two key points:

• The FTC exceeded its statutory authority: The court found that the FTC lacked the authority to impose the Final Rule under Section 6(g) of the Federal Trade Commission Act of 1914, a “housekeeping statute” that does not confer “substantive rulemaking power.”

• The Final Rule is “arbitrary and capricious”: The court also found that the Final Rule is “arbitrary and capricious” under the Administrative Procedure Act, the federal law governing agency “rulemaking,” because it is “unreasonably overbroad without a reasonable explanation” and “imposes a one-size-fits-all approach with no end date.”

WHAT DOES THIS MEAN FOR BUSINESS ENTITIES?

Due to its nationwide scope, this injunction means the Final Rule will not take effect on September 4, 2024, as planned. For now, employers do not need to notify employees that their noncompete agreements are rescinded, nor will businesses be precluded from entering into noncompetition agreements with new employees.

An FTC spokesperson said the agency was “disappointed” and is “seriously considering a potential appeal” to the US Court of Appeals for the Fifth Circuit. The spokesperson added that the “decision does not prevent the FTC from addressing noncompetes through case-by-case enforcement actions.”

McDermott will provide updates on further developments as they arise.