Federal Court Blocks FTC Rule Banning Noncompetes

A federal judge in Texas blocked the new rule issued by the Federal Trade Commission (FTC) that would have banned noncompete agreements effective September 4, 2024.

The Texas court granted summary judgment in favor of the U.S. Chamber of Commerce and other plaintiffs finding that the FTC “exceeded its statutory authority” in making the rule. The judge found that the rule was “arbitrary and capricious” and “based on inconsistent and flawed empirical evidence.” The judge noted that the FTC did not “consider the positive benefits of noncompete agreements” and disregarded “the substantial body of evidence supporting these agreements.” In short, the court held that there was a lack of evidence to support imposing “such a sweeping prohibition.”

The FTC rule would have banned any post-employment restriction preventing an employee from seeking or accepting work in the United States or operating a business in the United States. Prior to the FTC rule, the enforceability of a noncompete agreement has historically been governed by state law. In the vast majority of states, noncompete restrictions have been allowed as long as they are deemed reasonable to protect the legitimate interests of the employer.

Based on the court’s decision, the FTC will not be able to enforce the ban which would have taken effect on September 4, 2024. Other lawsuits in federal court are pending in Pennsylvania and Florida. In the Pennsylvania lawsuit, the court found that the plaintiff failed to show irreparable harm from the noncompete ban and the company was not likely to win the case. Because there are divergent rulings, the issue may end up on appeal before the U.S. Supreme Court.

The decision from the Texas court applies nationwide. Employers are no longer required to issue an FTC notice to employees advising that their noncompete agreements are invalid. For the time being, employers can continue their current practices and utilize noncompete agreements as permitted by state law.

Our Labor and Employment Group will keep you posted on further developments relating to the FTC rule.