Lindabury, McCormick, Estabrook & Cooper, P.C. Firm News & Events
On August 20, 2024, the U.S. District Court for the Northern District of Texas invalidated the Federal Trade Commission’s (FTC’s) final rule that effectively banned the use of noncompete agreements by U.S. employers. The ruling comes just in time for employers facing the inability to enter into or enforce noncompete agreements when the rule was slated to go into effect on September 4, 2024.
The Texas court reasoned that the FTC exceeded its constitutional authority by proposing “arbitrary and capricious” sweeping prohibitions against noncompete agreements rather than a more targeted ban on specific noncompete provisions that are deemed unfair competitive practices. In addition, the court noted that only Congress is authorized to issue substantive rules banning non-competes, whereas the FTC’s authority is limited to procedural rules aimed at implementing legislation passed by Congress, adding “[t]he role of an administrative agency is to do as told by Congress, not to do what the agency thinks it should do.”
Prior Judicial Proceedings:
The FTC rule was challenged in several jurisdictions by various business groups seeking to block the rule from taking effect. In an earlier ruling on July 3, 2024, the Texas court enjoined enforcement of the rule but that decision was limited to the parties in the case and did not affect continued enforcement of the FTC rule in other cases and jurisdictions. The Middle District Court of Florida issued a similar limited ruling against the FTC on August 14, 2024. However, in a similar challenge to the FTC’s rulemaking authority, the U.S. District Court, Eastern District of Pennsylvania, declined to preliminarily enjoin the FTC rule in part because it found that the FTC likely did not exceed its rulemaking authority through its comprehensive ban of noncompete agreements, thus creating a split among the circuits as to the enforceability of the FTC rule.
Nevertheless, the August 20th ruling from the Northern District of Texas stands as the last word on the subject – for now. The court noted that its final ruling applies to all parties in all judicial districts across the United States. Of course, the FTC can challenge the Texas court’s ruling through the appeals process but it faces two obstacles to success. First, an appeal would be to the typically pro-business 5th Circuit Court of Appeals. Second, while an adverse ruling by the 5th Circuit could be appealed to the U.S. Supreme Court, the current court has recently issued several landmark decisions aimed at reeling in efforts by administrative agencies to expand their rulemaking authority. In short, the current judicial climate makes it less likely that the FTC would prevail, and it is more likely that the agency will return to the drawing board and draft narrower restrictions on noncompete agreements that are more likely to withstand judicial challenge.
What’s Next for Employers:
Noncompete agreements are legitimately used by a wide array of employers to protect valuable confidential information and client relationships. While employers can celebrate the demise of the FTC noncompete ban, they nevertheless must be mindful that noncompete agreements can still be subject to challenge as overbroad and unduly burdensome. In addition, many states have enacted local restrictions on noncompete agreements that are unaffected by the Texas court’s ruling. For example, California, Minnesota, North Dakota and Oklahoma are among the states that have implemented noncompete bans and similar legislative efforts are gaining steam in other jurisdictions.
Before moving to enforce or impose a noncompete agreement against an employee, employers should consult with legal counsel to ensure that the restrictions do not run afoul of both federal and local jurisdictional requirements. Moreover, in light of the increasing disfavor of noncompete agreements that preclude employees from seeking employment in industries where they have marketable experience, employers should consider imposing less restrictive post-employment restrictions that provide significant protections against unfair competitive practices by former employees. These include nondisclosure of confidential information and client/employee non-solicitation agreements that permit the employee to compete but preclude the employee from using the company’s proprietary information or poaching the company’s customers or employees for a reasonable period of time.