The FTC and Non-Compete Agreements: The Ban Gets Blocked

This is the fourth article from Strauss Troy in a series on the Federal Trade Commission’s (“FTC”) recent rule on post-employment non-competition agreements. If you missed the first article, which discusses the scope and practical realities of the FTC’s non-compete ban, you can read it here.

If you missed the second article, which discusses the Northern District of Texas court’s grant of a preliminary injunction postponing the effective date of the rule as it applies to the plaintiffs in that case, you can read it here.

If you missed the third article, which discusses the Eastern District of Pennsylvania court’s denial of a preliminary injunction that would have postponed the effective date of the rule as it applies to the plaintiffs in that case, you can read it here.

On August 20, 2024, the U.S. District Court for the Northern District of Texas issued an order blocking the FTC’s rule that would have invalidated tens of millions of existing non-compete agreements and precluded almost all new ones. Several weeks ago, this court issued a preliminary injunction against the FTC’s rule that applied only to the plaintiffs in that case. Companies were already in the process of preparing to deal with the obligations imposed by the new rule, including a provision that required employers to send individualized notices to all employees affected by existing non-competes. However, this latest ruling blocks the FTC from enforcing the rule nationwide, meaning the rule will no longer go into effect on September 4, 2024.

In its ruling blocking the FTC’s non-compete ban nationwide, the Texas court held that the FTC lacked the authority to create substantive rules, as opposed to merely procedural rules, and noted that the FTC had long disclaimed the ability to issue substantive rules, and even when the FTC suggested it had such authority, it failed to issue a single substantive rule under the specific subsection of the FTC Act on which it relied for the authority to issue the non-compete ban. Additionally, the court found that the rule itself was arbitrary and capricious, calling it “unreasonably overbroad without a reasonable explanation” and “a one-size-fits-all approach with no end date.” The court concluded that the non-compete ban was “an unlawful agency action” and determined that the proper remedy was to set aside the ban in its entirety.

The FTC has suggested it will appeal the decision to the Fifth Circuit Court of Appeals and plans to continue to examine non-compete agreements on a case-by-case basis. But for now, employers have clarity that they no longer have to go through the process of notifying current and former employees that their non-competes are unenforceable by a deadline that was just weeks away. While this is likely not the final chapter in this saga, employers can continue enforcing their non-competes in accordance with applicable state laws for the foreseeable future.

Companies and individuals should stay informed about any updates or changes related to the FTC’s new rule. Restrictive covenant enforcement is a rapidly changing area of law event apart from this FTC battle.  Our team at Strauss Troy will continue to provide updates on the challenges to the FTC’s new rule, and are here to answer any questions or concerns you may have.

Stephen S. Schmidt: ssschmidt@strausstroy.com or 513.629.9422

Andrew D. White: adwhite@strausstroy.com or 513.629.9466