FTC Total Non-Compete Ban Blocked from Taking Effect

A U.S. District Court has struck down the FTC’s prohibition of all non-compete agreements, ruling that the agency overstepped its authority. This ruling has nationwide effect.

Applies to:

All Employers

Effective:

August 20, 2024

Key Information for Employers:

• The U.S. District Court for the Northern District of Texas ruled the Federal Trade Commission’s (FTC) final rule prohibiting all non-competition agreements to be unlawful.
This ruling has nationwide effect and blocked the FTC’s rule from going into effect on September 4, 2024.

Additional Information about the Court’s Decision

The U.S. District Court for the Northern District of Texas ruled the Federal Trade Commission’s (FTC) final rule prohibiting all non-competition agreements to be unlawful. This ruling has nationwide effect and blocked the FTC’s rule from going into effect on September 4, 2024. The court previously issued a limited preliminary injunction which prevented the rule from being enforced against the plaintiffs in the case. This ruling is now the final judgment in this matter.

In this case, a tax consulting firm in Dallas, TX and the U.S. Chamber of Commerce separately filed claims to vacate and set aside the rule. In its ruling, the court applied the Administrative Procedure Act and found the FTC’s rule: (1) exceeded the FTC’s statutory authority; and (2) was arbitrary and capricious because it was “unreasonably overbroad without a reasonable explanation.” The court noted that the FTC did not consider the benefits of non-competition agreements or any evidence supporting the need for them. This ruling means employers no longer have to prepare notices to current and former employees informing them of the effect of the rule on their non-competition agreements.

The conflicting rulings between the Texas and Pennsylvannia courts and the likelihood that the FTC will appeal the Texas decision means that the final fate of the FTC’s rule will ultimately be resolved by a higher court.

Contrasting with this ruling is a decision from the U.S. District Court in Pennsylvania which upholds the FTC’s ban by denying a preliminary injunction against it. This ruling impacts employers nationwide as well. With the conflicting Pennsylvania ruling, and the FTC likely appealing the Texas ruling, the final fate of the rule will ultimately be resolved by a higher court. Until then, employers should be aware that there are several bans and restrictions on non-competition agreements at the state level. Regardless of this ruling, employers should consult with legal counsel regarding any current or future non-compete agreements to address compliance with state requirements.

Action Items for Employers

Review non-competition agreements with legal counsel.

Looking for cutting-edge compliance analysis? Check out the on-demand webinar event AI Isn’t Coming—It’s Here. Employer Compliance Guidance in a New Era of Tech.