A significant legal decision has recently been made that impacts businesses across the United States. On August 20, 2024, the U.S. District Court for the Northern District of Texas struck down the Federal Trade Commission’s (FTC) rule that would have banned non-compete agreements with workers nationwide. This ruling comes weeks before the ban was set to take effect, allowing employers to continue using non-compete agreements according to their state laws.

While the rule could pass through an appeal, for now, businesses do not need to worry about complying with the rule by the original September 4 deadline.

Here’s what you need to know about this major development and the steps you should consider taking now.

Background On the Ruling

This year, the FTC voted 3-2 on April 23, 2024, to adopt a final rule banning non-compete agreements, which they published on May 7, 2024. The rule aimed to prohibit most non-compete clauses between businesses and workers as an “unfair method of competition.” It would have required companies to refrain from enforcing most existing non-compete agreements and to notify workers that any such obligations were now unenforceable. The rule was initially scheduled to take effect on September 4, 2024.

However, several lawsuits were filed against the FTC to challenge this rule. Ryan LLC, a global tax consulting firm based in Dallas, Texas, was the first to file a lawsuit against the FTC on April 23, 2024, seeking to vacate and set aside the rule. The U.S. Chamber of Commerce filed a similar lawsuit a day later in a different Texas court and later joined Ryan LLC’s lawsuit when its own was suspended. Other businesses soon followed with similar legal challenges, arguing that the FTC had exceeded its authority.

The Court’s Decision

On July 3, 2024, Judge Ada Brown of the U.S. District Court for the Northern District of Texas initially issued a limited ruling. She granted a preliminary injunction to temporarily block the enforcement of the FTC’s rule, but only for the parties involved in the lawsuit. However, on August 20, 2024, Judge Brown issued a much broader ruling. She concluded that the FTC had exceeded its authority in issuing the non-compete rule, which was intended to address unfair methods of competition.

Judge Brown provided two main reasons for striking down the rule:

  1. Exceeding Authority: The court ruled that the FTC went beyond its authorized power. According to the judge, Congress had only allowed the FTC to issue rules related to unfair competition, not broad ones like the non-compete ban.
  2. Arbitrary and Capricious: The court found that the rule was “arbitrary and capricious” because it was too broad and relied on inconsistent and flawed empirical evidence. The judge noted that the rule applied a one-size-fits-all approach without a reasonable explanation, ignored the benefits of non-competes, and failed to consider less drastic alternatives.

Judge Brown’s final judgment set aside the rule and stated that this decision applies nationwide, not just to the parties involved in the lawsuit. This means that no employer in the U.S. is required to comply with the rule.

What Does This Mean for Employers?

For now, the FTC’s nationwide non-compete ban will not take effect, and businesses can continue to use non-compete agreements according to the specific laws of their states. However, the FTC may appeal this decision to the Fifth Circuit Court of Appeals. Even if the rule is not revived, it could be years before the legal battle over non-competes is entirely resolved.

Employer Considerations

Here are the most critical points for employers to consider following this ruling:

  1. Status quo restored. Businesses that were preparing to comply with the FTC’s non-compete rule by rewriting agreements or notifying employees can pause those efforts. According to The National Law Review and Fisher & Phillips LLP, the rule did not take effect on September 4, 2024.
  2. Be prepared for future developments. While the FTC’s rule may not be reinstated, the agency might continue to pursue specific non-compete agreements. Businesses should remain vigilant and ensure that their non-compete clauses comply with state laws and are tailored to protect business interests.
  3. Monitor legal changes. The legal landscape around non-compete agreements is still evolving, especially at the state level. The attention on non-competes from state courts and legislatures is likely to continue, and employers should stay updated on any new developments.
  4. Review and update agreements. Now is a good time to review and update non-compete agreements to ensure they align with your state laws.
  5. Create an inventory of agreements. Employers should keep inventory of all restrictive covenant agreements, including those that bind former employees. Doing so would be helpful if further legal challenges arise or if there is a need to demonstrate compliance with evolving laws.

What’s Next?

The FTC has the option to appeal this ruling to the Fifth Circuit Court of Appeals. If the appeal fails, the next step could be a potential review by the Supreme Court. Although non competes are rarely found enforceable or pursued, employers should remain vigilant and continue to monitor the situation as it develops.