FTC Rule Prohibiting Non-Compete Agreements Set Aside by Texas Court

On August 20, 2024, a judge in the United States District Court for the Northern District of Texas entered an order prohibiting the Federal Trade Commission (FTC) from implementing a new rule that would have prohibited employers from enforcing non-compete agreements for the vast majority of employees in the United States as of September 4, 2024 (see our prior analysis of that rule here.)

In its ruling, the district court determined that the FTC lacked the statutory authority to create substantive rules regulating unfair methods of competition, which was the Commission’s cited basis for its rule prohibiting non-competes.  The court also determined that the FTC’s actions in creating the rule were “arbitrary and capricious” in violation of the Administrative Procedure Act, as the FTC’s rule was unreasonably overbroad in scope, and the evidence cited by the Commission in support of its rule did not adequately justify the decision to implement the rule as written. 

In a previous ruling issued July 3, 2024 granting a request for preliminary injunction, Judge Ada Brown ruled that the plaintiffs in the case were likely to succeed on the merits of their claims and blocked enforcement of the rule, but only as applied to the specific plaintiffs in the case (see our analysis of that decision here.)  The court’s ruling this week goes further, holding the rule unlawful and setting it aside entirely. As a result, the FTC’s rule prohibiting non-compete agreements will not go into effect on September 4 as originally planned.

The key takeaway from the final ruling is that employers are no longer required to make changes to their restrictive covenants or send notice to impacted employees by September 4, 2024, as originally required in the FTC’s rule.  The FTC is likely to appeal the district court’s ruling, and other district courts around the country are simultaneously considering challenges to the FTC’s rule that may result in split decisions, but this matter is not likely to be resolved for years.  For now, employers should continue to look to state law to determine the enforceability of any restrictive covenants.

If you have questions about how the Northern District of Texas’s decision to set aside the FTC’s rule on non-competes could impact your business, or about how to best utilize employee restrictive covenants moving forward, contact your Dinsmore attorney.