In April 2024, the Federal Trade Commission announced its final Rule banning non-compete clauses for the majority of Americans. Since then, courts across the country have made rulings on whether the FTC can ban non-compete clauses.
In July 2024, two federal courts made competing rulings: a court in Texas entered an initial, narrow injunction against the Rule, claiming the FTC likely did not have the authority to implement it, although the decision was limited solely to the employers involved in that case. Separately, a court in Pennsylvania denied a request for an injunction against the Rule on the grounds that the FTC in fact does have the authority to prohibit non-compete clauses.
Early in August 2024, a federal court in Florida also made an initial ruling that the FTC could not implement the Rule. Similar to the Texas court, the Florida court limited its decision to the employer in that case.
Now the Texas court has made a definitive ruling.
What Did the Texas Court Say?
On August 20, 2024, a federal court in Texas issued its final decision, holding that the FTC cannot implement its Rule. This time, the court determined that it “must ‘hold unlawful’ and ‘set aside’ the FTC’s rule as required under the [Administrative Procedure Act],” applicable to everyone.
Therefore, the Rule will not be effective on September 4, 2024, and there will likely be an appeal of the decision.
The Texas court determined “that the FTC lacks statutory authority to promulgate the Non-Compete Rule, and that the Rule is arbitrary and capricious.” The court explained the FTC does not have the authority to make substantive rules, and that the Rule is “arbitrary and capricious because it is unreasonably overbroad without a reasonable explanation.”
What Does This Mean Right Now?
Unless overturned on appeal, the enforcement of non-compete clauses will remain the same: a non-compete will be adjudicated based on applicable state law. States evaluate non-compete clauses in various ways, from complete bans to enforcing the clauses, as long as they are reasonably necessary to protect a legitimate business interest.
Regardless of the FTC’s Rule and the recent litigation, states have continued to pass legislation that narrows and limits the enforcement of non-compete clauses. As a result, companies should engage in certain best practices:
- Continue reviewing their agreements to ensure the agreements comply with applicable law,
- Use alternative agreements to protect key and sensitive information, and
- Conduct audits to ensure information is protected.
Employees should continue reviewing, understanding, and negotiating their non-compete clauses and all other restrictive covenants or clauses that apply after the termination of employment. As always, seek experienced legal counsel if you have questions or concerns.