Federal District Court Grants Plaintiff Employers Early Victory in Legal Battle Against the FTC’s Non-Compete Ban
This article was originally published on July 3 and updated on July 5.
On Wednesday, July 3, a federal District Court in Texas temporarily halted implementation and enforcement of the FTC’s final rule banning “non-compete clauses” (the “Final Rule”) as to the several employer plaintiffs in the case. There are numerous caveats to this ruling, most notably that it is limited to the plaintiffs themselves. Nevertheless, for now, employers hoping to continue their use of non-compete clauses and similar agreements can count the decision as an indication that the Final Rule faces an uphill battle in courts.
Background of the FTC’s Final Rule
On Tuesday, April 23, the FTC issued the Final Rule banning most non-compete agreements between an employer and its workers, including independent contractors. Specifically, the FTC’s rule would prohibit employers from entering into or otherwise enforcing non-compete clauses—and similar agreements, in some cases—beginning on September 4, 2024. It would also require employers to notify workers subject to such agreements that their agreements are no longer enforceable.
A broader discussion of the FTC’s Final Rule can be accessed here.
Legal Challenges to the FTC’s Final Rule
Legal challenges began immediately following the FTC’s announcement of the Final Rule.
This week, the Texas court agreed that the Final Rule should not take effect as to the five entities in the suit. As part of its ruling, the court found that “the FTC lacks statutory authority to promulgate the [Final Rule], and that the [Final] Rule is arbitrary and capricious.” The court specifically declined to extend its ruling beyond the parties to the lawsuit.
Implications of the Court’s Decision
To be clear, the court’s decision in this case is limited to the parties of that particular litigation. Nevertheless, the court’s decision is a win for employers at the first step of what is likely to be an extended fight against the FTC’s Final Rule.
Employers should also note that the court’s ruling is not a final decision on the legality of the Final Rule, even as to those particular plaintiffs. The court indicated in its ruling that it would issue its final decision on or before August 30, 2024.
In short, while the court’s decision is a win for employers seeking to enforce non-compete agreements, employers must stay on the lookout for further updates from the courts on whether the Final Rule will come into effect.
For assistance on any of these issues, please contact a member of our Labor & Employment Team.