(Update) Texas Court Halts FTC's Noncompete Ban in a Limited Ruling

Update: On August 20, 2024, a federal judge in Texas struck down the Federal Trade Commission’s final rule that would have banned most noncompetes before it went into effect. Therefore, noncompete agreements generally still lawful. Nonetheless, businesses should revise existing employment agreements to mitigate the effect of such a rule in the future.

More than 30 million Americans are currently subject to a non-compete agreement. Two months ago, the Federal Trade Commission (FTC) enacted a rule, effective September 4, 2024, that would invalidate all such agreements, except those applicable to senior executives. However, on July 3, a judge for the U.S. District Court for the Northern District of Texas granted a temporary injunction preventing the FTC from enforcing the new rule, albeit only applicable to the parties in the case.

Ryan LLC, a small tax preparation firm in Northern Texas, and the U.S. Chamber of Commerce challenged the enforceability of the FTC’s non-compete ban in federal court in Northern Texas. The judge in the case held that Ryan LLC and the Chamber of Commerce have a high likelihood of success on the merits because Congress never granted the FTC the substantive rulemaking authority to pass such sweeping rules regarding unfair methods of competition. Further, the court held that the rule is arbitrary and capricious, being overly broad with no reasonable explanation.

However, while the Court did grant a preliminary injunction preventing the FTC from enforcing its non-compete ban on Ryan LLC and the Chamber of Commerce, the Court refused to impose a nationwide injunction in the FTC non-compete rule, due to become effective on September 4th   for any employer not covered by the injunction.  Despite the limited scope of this ruling,, a nationwide injunction being passed in the near future seems likely, as opponents of the FTC’s rule are aggressively seeking to prevent the rule from taking effect. Thus, employers can likely maintain the status quo for the time being, but should keep their eye out for developments in litigation over the FTC’s rule.