Texas Court Blocks FTC Rule Banning Employment Restrictive Agreements

The US District Court for the Northern District of Texas delivered a much anticipated ruling on August 20, 2024, blocking the U.S. Federal Trade Commission’s (FTC) final rule (the “Rule”) banning all non-compete agreements (“NCAs”) with workers from taking effect on September 4, 2024. Unlike the Texas court’s July 3, 2024 preliminary injunction, this ruling blocks the Rule from taking effect on a nationwide basis. Accordingly, all employers using NCAs will not be subject to the ban on September 4th, and will not need to comply with the so-called “safe harbor” notice and other requirements discussed in our previous post – “Latest on FTC Rule Banning Employment Restrictive Agreements”.

In its August 20th decision, the Texas court ruled that the FTC exceeded its statutory authority under the Federal Administrative Procedure Act (APA) in implementing the Rule, reasoning the FTC lacks substantive rulemaking authority associated with unfair methods of competition. The court also held that because the Rule is unreasonably overbroad without a reasonable explanation, the Rule is necessarily “arbitrary and capricious.” Upon concluding the FTC acted unlawfully in issuing the Rule, the Texas court decided the only appropriate remedy under the APA was to set the Rule aside.

While the Texas court decision represents a welcome development for employers with NCAs, it should be noted that the FTC is considering appealing the ruling to the US Court of Appeals for the Fifth Circuit, which could be further appealed to the U.S. Supreme Court.

While employers wait for a final determination on the fate of the Rule, they would be best served to revisit their current NCAs to ensure they remain enforceable under existing state law. The LCOJ Employment Team stands ready to help navigate questions associated with the complex web of current and proposed legislation affecting NCAs.

Written By:
Attorney Shane A. Anderson