On July 3, 2024, a Federal Court in Texas issued a preliminary injunction, blocking implementation of the Federal Trade Commission’s (“FTC”) rule (the “Rule”) banning non-compete agreements. It should be noted that the effect of the injunction is limited to the plaintiffs in this case. Nevertheless, this ruling, resulting from just one of several legal challenges to the Rule, could signal significant implications for employers, employees, and contractors nationwide. Here’s an in-depth look at the current status and potential impact.
The FTC’s rule, published on May 7, 2024, aims to prohibit non-compete clauses in employment and independent contractor agreements, and is still set to take effect on September 4th, 2024 for the vast majority of employers in the United States. The Rule was designed to promote competition and worker mobility by eliminating restrictions that prevent employees from joining or starting competing businesses after leaving an employer. The Rule emerged from the FTC’s determination that non-compete agreements are an “unfair method of competition” under Section 5 of the FTC Act. The Rule has an extremley broad scope and impacts all workers and industries except for certain high-level executives,business sellers, and workers employed by nonprofits.
The Court’s Decision
The U.S. District Court for the Northern District of Texas granted a preliminary injunction against the FTC’s rule following lawsuits filed by various business groups, including the tax firm, Ryan LLC, and the Chamber of Commerce. These groups argued that the FTC exceeded its statutory authority and that the Rule would negatively impact businesses by making it more challenging to protect trade secrets and retain key employees. The court’s decision to block the rule means that the Rule’s prohibition on non-compete agreements will not take effect on the initially scheduled date, pending further judicial review.” The court reasoned that agencies like the FTC have only the powers that Congress grants them, and that the Rule’s broad restriction on non-competes may be beyond the scope of the FTC’s powers. Further, in evaluating the non-compete ban under the Administrative Procedure Act’s (“APA”) arbitrary and capricious standard, the court found that “there is a substantial likelihood the Rule is arbitrary and capricious because it is unreasonably overbroad without a reasonable explanation.”
Again, this preliminary injunction is only applicable to the plaintiffs in this case, and the outcome of the case is still pending the court’s ruling on the merits. That decision is expected to be issued by August 30, 2024.
Consequently, although this ruling signals that courts are sympathetic to the arguments of the Rule’s legal challengers, no court has taken the broader step of imposing a nationwide injunction on implementation of the Rule. The best chance for such a sweeping injunction may come from another federal court case that is currently pending in Pennsylvania. The Pennsylvania case also has a pending preliminary injunction order that is set to be released on July 23, 2024.
The Texas court’s decision marks a significant moment in the national discussion on non-compete agreements. Although the non-compete ban is on hold for these plaintiffs, the Rule is still set to go into effect for all other employers on September 4th, 2024. Consequently, all employers should take preliminary steps to prepare for implementation of the Rule and to ensure that they comply with all notice requirements imposed by the Rule.
The outcomes of the Rule’s legal challenges will shape the future of employment practices in the United States. Employers and employees should monitor the situation closely and be ready to adapt to legal changes. If you have any questions about how the FTC’s ban on non-competes may affect your business please contact the attorneys at Lengea Law for up-to-date guidance.