Good News for Employers: Texas Court Blocks FTC’s Non-Compete Ban

On August 20, 2024, a judge in the U.S. District Court for the Northern District of Texas granted a nationwide injunction against the Federal Trade Commission’s (“FTC’s”) rule banning non-competes with employees (the “Rule”).  As we previously reported, the court foreshadowed this ruling last month when it issued a limited injunction, barring the Rule from applying only to the plaintiffs in that case.  For now, employers can breathe a sigh of relief that the court has extended the injunction to all employers.

Although companies can continue using non-competes without regard to the Rule, they are not out of the woods yet. The FTC is considering appealing this ruling and continues to believe it can take individual enforcement actions against non-competes. Employers must also contend with the trend of states continuing to limit (and in some cases ban) non-competes and other regulators, like the National Labor Relations Board, taking enforcement against employment non-competes. Employers should consider taking this opportunity to review their non-compete agreements and practices to ensure they are prepared to navigate the evolving landscape for non-competes.

What This Ruling Means

The Rule, previously set to go into effect on September 4th, 2024, is no more—at least for now.  The court found that the FTC improperly exceeded its statutory authority by creating a substantive Rule banning non-competes based on the FTC Act’s “housekeeping statutes.” The court also concluded that the Rule violated the Administrative Procedure Act because it was a “sweeping prohibition” that served as an arbitrary and capricious “categorical ban.”

Although the Rule is currently enjoined, the FTC has already indicated that it may appeal this decision. Whether the FTC actually appeals the ruling, or the ruling will be upheld on appeal remains to be seen.  Regardless, the FTC has indicated that it does not believe the decision impacts its ability to take individual enforcement actions against employee non-competes that the FTC believes violate its laws.

What Can Employers Do Now

Despite the ruling, employers should remain vigilant and proactive in reviewing their non-compete agreements and practices.  The landscape surrounding employment non-competes continues to change, so it is crucial to stay informed and compliant with both state and federal regulations as they evolve. For now, employers might consider:

• Reviewing existing restrictive covenants to ensure they are properly tailored to the circumstances of the business, restricted employee, and applicable laws—including reviewing the functional scope, duration, and geographical limitations.

• Working with counsel on a strategy to update overbroad restrictive covenants or to enforce existing restrictive covenants.

• Examining trade secret protection policies and programs, including implementing robust policies and procedures to safeguard sensitive proprietary and confidential information, training employees on the importance of protecting such information, and ensuring access to proprietary and confidential information only to those who need it for their job functions.