On August 20, a federal judge in the Northern District of Texas blocked the Federal Trade Commission’s (FTC) rule banning non-competes. The rule, which would have rendered most non-compete agreements unenforceable and required employers to notify employees and former employees that their agreements were no longer enforceable, was set to go into effect on September 4, 2024.

The court ruled that the Federal Trade Commission Act (FTCA) did not grant the FTC the authority to issue a substantive rule that retroactively invalidated millions of existing non-compete clauses. Instead, the FTCA grants the FTC the authority to prevent unfair methods of competition through case-by-case adjudication. Judge Ada Brown also held that the FTC’s rule was arbitrary and capricious because the agency did not have sufficient evidence to support such a categorical ban and failed to consider less restrictive alternatives.

The agency has 60 days—until October 19—to appeal the decision.  But as of now, the rule is set aside and will not be enforce or otherwise take effect on September 4.

However, this does not mean that employers can return to “business as usual” regarding non-competes. The FTC has continued to encourage states to ban or restrict the use of non-compete clauses, which many have done. Specifically, California, North Dakota, Oklahoma, and Minnesota treat non-competes as generally void and unenforceable. New York’s, Maine’s, and Rhode Island’s legislatures passed bills significantly restricting non-competes, but all three of their governors vetoed the bills. Additionally, a number of states in recent years have limited non-competes for low-wage workers. These states include Colorado, Illinois, Maine, Maryland, Massachusetts, New Hampshire, Nevada, Oregon, Virginia, Washington, and the District of Columbia.

Opposition to non-competes enjoys bi-partisan support, and it is likely that we will continue to see states restrict the use of non-competes.  To protect their interests, in addition to any non-compete restrictions, employers should strengthen their non-solicitation and confidentiality agreements and work to protect confidential information as much as possible.

Questions?
Contact the author Bridget McConville.