On August 20, 2024, a Texas federal court ruled that the FTC’s final rule banning most non-compete agreements (the “Non-Compete Rule”) cannot go into effect as scheduled. Many employers had been preparing to comply with the Non-Compete Rule on its scheduled effective date of September 4, 2024, while others eagerly awaited court guidance on whether the Rule might be halted. The Texas court’s decision means that employers will not have to comply with the Rule on its scheduled timeframe.
However, the Texas court’s ruling is unlikely to be the final word on whether the Non-Compete Rule can ultimately go into effect. Indeed, the FTC has already announced it is considering an appeal of that decision, and at least one other federal court in Pennsylvania has preliminarily determined that the Rule should be allowed to take effect. Ultimately, these competing decisions will likely need to be resolved by appellate courts and, in the meantime, employers should continue to monitor the ongoing legal challenges to the Non-Compete Rule. For now, however, employers can go “pencils down” on compliance with the FTC rule and resume their focus on the applicable state laws that have historically governed non-competes and their enforcement.
Background of Legal Challenges to the Non-Compete Rule
On Tuesday, April 23, 2024, the FTC issued the Non-Compete Rule banning most non-compete agreements between an employer and its workers. The Non-Compete Rule would prohibit employers from entering into or otherwise enforcing non-compete clauses and some similar agreements, beginning on September 4, 2024. It would also require employers to notify workers subject to such agreements that their agreements are no longer enforceable. A broader discussion of the Non-Compete Rule can be accessed here.
Legal challenges to the Non-Compete Rule began immediately, with suits being filed in federal courts in Texas and Pennsylvania shortly after the Non-Compete Rule was released. In both cases, employers sought to temporarily halt enforcement and implementation of the Non-Compete Rule, arguing on various bases that the Non-Compete Rule was unlawful.
Initially, the Texas court granted the employer’s request, finding that “the FTC lacks statutory authority to promulgate the Non-Compete Rule, and that the [Non-Compete] Rule is arbitrary and capricious.” However, that ruling was preliminary, and only applied to the parties to the Texas action, thus leaving open the question of whether the Non-Compete Rule is enforceable beyond those parties. Thereafter, the Pennsylvania court denied an employer’s efforts to temporarily halt implementation and enforcement of the Non-Compete Rule. These initial rulings left employers eagerly awaiting further court rulings that might add clarity to whether September 4th compliance would be required.
The Texas Court’s Final Ruling
Yesterday, August 20, 2024, the Texas court issued its final ruling on the lawfulness of the Non-Compete Rule. The court struck down the Non-Compete Rule, stating that “the [Non-Compete] Rule shall not be enforced or otherwise take effect on its effective date of September 4, 2024 or thereafter.” The Texas court reaffirmed its preliminary decision that the FTC lacked the statutory authority to implement the Non-Compete Rule and, that the Non-Compete Rule was arbitrary and capricious.
Unlike its preliminary ruling, which was limited to the parties to the lawsuit itself, the Texas court applied its final ruling to all employers nationwide. The court specified that its decision to set aside the Non-Compete Rule “has nationwide effect, is not party-restricted, and affects persons in all judicial districts equally.” (quotations omitted).
Implications of the Texas Court’s Final Ruling
The Texas court’s final ruling marks the first time a court has set aside the Non-Compete Rule on a nationwide basis. As a result of the ruling, the FTC cannot implement or enforce its Non-Compete Rule against any employer without violating the Texas court’s final ruling. Accordingly, employers that have been preparing to comply with the Non-Compete Rule by September 4 may set those efforts aside, for now.
The Texas court’s ruling may not be the final word on the Non-Compete Rule. Indeed, the FTC has indicated it is considering appealing the ruling to the Fifth Circuit Court of Appeals. It is possible that the FTC could succeed on appeal with a ruling that overturns the Texas court’s decision and deems the Non-Compete Rule to be lawful. Additionally, the Pennsylvania court, whose preliminary ruling was directly contrary to that of the Texas court, has yet to issue a final ruling in the case pending before it. Ultimately, unless the FTC withdraws the Non-Compete Rule, the United States Supreme Court may need to weigh in to finally resolve the lawfulness of the Non-Compete Rule.
For now, employers can put a hold on efforts to comply with the Non-Compete Rule, while continuing to monitor updates from the courts on its status. In the event that the Texas court’s decision is overturned, and the Non-Compete Rule is found to be lawful, employers should be prepared to comply with the Non-Compete Rule.
