Publication
FTC Non-Compete Ban Halted Nationwide by Texas Federal Court’s Ruling
Quick Points
- A district court in Texas banned the FTC’s final rule nationwide, finding the FTC lacked the authority to enact the non-compete ban.
- The non-compete ban will not go into effect on September 4, 2024, as planned, although the FTC states it may appeal the ruling.
- This ruling should allay the fears of employers who worried that the ban would prevent them from enforcing existing restrictive covenant agreements, including non-competes.
- Following the ruling, an FTC spokesperson said, “[t]oday’s decision does not prevent the FTC from addressing non-competes through case-by-case enforcement actions,” so clients should still consider carefully tailoring their restrictive covenant agreements such that they only protect legitimate business interests.
Discussion
On Tuesday, August 20, 2024, Judge Ada Brown of the United States District Court for the Northern District of Texas issued an order finding the Federal Trade Commission’s (FTC) rule banning non-compete agreements to be unlawful. The non-compete ban, which was set to go into effect on September 4, 2024, has been enjoined permanently and nationally.
As we reported back in April, the FTC issued the “Non-Compete Clause Rule” under sections 5 and 6(g) of the Federal Trade Commission Act (FTCA). The FTC claimed it implemented the rule to promote competition by banning non-competes nationwide, to protect the fundamental freedom of workers to change jobs, which it represented would increase innovation and foster new business formation.
The rule provided that it was an unfair method of competition — and therefore a violation of section 5 of the FTCA — for persons to, among other things, enter into non-compete clauses with workers on or after the final rule’s effective date. With respect to pre-existing non-competes, the rule adopted a different approach for a narrow class of senior executives than it did for other workers. For senior executives – a term narrowly defined to include only the highest-level executives with ultimate decision-making authority in an organization – existing non-competes would remain in force, while existing non-competes with other workers would be rendered void as of September 4, 2024, the effective date of the rule. The rule also required employers to provide clear and conspicuous notice to workers subject to a prohibited non-compete, in an individualized communication, that the worker’s non-compete clause will not be, and cannot legally be, enforced against the worker.
Two days after the rule was announced, a leading global tax service and software provider challenged the rule in federal court, seeking to enjoin the FTC from enforcing the rule. The tax services provider and plaintiff-intervenors, including advocates for business organizations, argued the rule was unlawful and exceeded the authority of the FTC. Signaling the rule would likely be held unlawful on the merits, Judge Brown issued a preliminary injunction on July 3, 2024, finding that the rule would cause irreparable harm and that the FTC exceeded its statutory authority by enacting the rule. While the preliminary injunction applied only to the parties in that case, Judge Brown’s August 20 ruling banning the final rule applies nationally.
The district court’s final decision was a stern rebuke of the FTC’s push to expand its rulemaking authorities beyond traditional consumer protection regulations and into its essentially unused regulatory authority over “unfair methods of competition.”
In response to the August 20 ruling, the FTC stated that it may appeal the ruling, and reiterated the FTC’s commitment to ongoing non-compete oversight through case-by-base enforcement actions. Two other legal challenges to the FTC non-compete ban remain pending in federal courts in Pennsylvania and Florida, and it is widely anticipated that conflicting decisions may set up a circuit split on the FTC’s rulemaking authority and the overall fate of the non-compete ban.
About Snell & Wilmer
Founded in 1938, Snell & Wilmer is a full-service business law firm with more than 500 attorneys practicing in 16 locations throughout the United States and in Mexico, including Los Angeles, Orange County and San Diego, California; Phoenix and Tucson, Arizona; Denver, Colorado; Washington, D.C.; Boise, Idaho; Las Vegas and Reno, Nevada; Albuquerque, New Mexico; Portland, Oregon; Dallas, Texas; Salt Lake City, Utah; Seattle, Washington; and Los Cabos, Mexico. The firm represents clients ranging from large, publicly traded corporations to small businesses, individuals and entrepreneurs. For more information, visit swlaw.com.
