On August 20, 2024, Judge Ada Brown of the U.S. District Court for the Northern District of Texas vacated the Federal Trade Commission’s (FTC) final Rule that the FTC enacted to ban non-compete agreements.  Judge Brown held that the FTC exceeded its statutory authority and invalidated the Rule on a nationwide basis. The Rule had been scheduled to take effect on September 4, 2024, but is now blocked, pending a potential appeal by the FTC to the Fifth Circuit Court of Appeals.

The Opinion

Judge Brown’s entry of a permanent injunction was consistent with her July 3 decision granting the preliminary injunction blocking the Rule. The Court stated that the FTC did not have “authority to promulgate substantive rules regarding unfair methods of competition.”

The Court also concluded that the Rule was arbitrary and capricious because it is “unreasonably overbroad without a reasonable explanation.” The Court stated that the FTC’s evidence, which consisted of certain studies that examined the economic effects of various state policies towards non-competes, and compared different states’ approaches to enforcing non-competes based on specific factual situations, did not support the FTC enacting a sweeping prohibition against all non-competes. The Court also rebuked the FTC for failing to consider less disruptive alternatives, finding that the Rule was unreasonable.

Impact of the Court’s Ruling and Next Steps for Employers?

With Judge Brown’s decision that the Rule is unlawful, employers may continue to have employees sign non-competes and enforce those agreements.  Businesses are also relieved from the Rule’s provision which required employers to send notices voiding the non-competes that current and former employees had previously signed.

However, businesses still must navigate state laws and other court decisions that seek to limit non-compete agreements.  The FTC may appeal Judge Brown’s decision; and as we last reported, other federal courts could reach different decisions on the FTC non-compete ban litigation. Last week, a federal judge in Florida ruled that the ban was likely invalid and blocked it from being applied to a real estate developer. However, last month, a federal judge in the Eastern District of Pennsylvania reached the opposite conclusion, holding that the FTC has clear legal authority to issue procedural and substantive rules as is necessary to prevent unfair methods of competition. If these cases are appealed and the Courts of Appeals are divided, Supreme Court review would be possible.

For now, businesses in Texas and other states that have not banned or restricted non-competes may continue to enforce those agreements.  Notably, several states, including California, Colorado, Illinois, North Dakota, Oklahoma, Massachusetts, Washington DC, Oregon, Minnesota, and Washington, ban or substantially restrict non-compete agreements. Companies should continue to analyze their use of non-compete and other restrictive covenants and confidentiality agreements to adhere to the state laws and ensure that when such agreements are permitted, that they are reasonable as to time, scope and geography. 

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