Texas Court Strikes Down FTC Rule Banning Noncompetition Agreements Weeks Before Enforcement

August 21, 2024

Jordan Jeter and Matt Heldt - Tonkon Torp LLP

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On Tuesday, August 20, 2024, the U.S. District Court for the Northern District of Texas struck down the Federal Trade Commission’s (FTC’s) final rule banning most noncompetition agreements. The FTC was set to start enforcing the rule on September 4, 2024, but now cannot.

Background

The FTC rule, which was first announced on April 23, 2024, would have significantly shifted the use and enforceability of noncompetition agreements in the United States. Since its publication, multiple cases challenging the rule have been initiated in federal court, but no court had yet fully invalidated the rule. Two federal courts, one in Texas and one in Florida, issued injunctions preventing enforcement, but only against the specific parties involved in the lawsuits. This left the rest of employers subject to the rule. A different federal court in Pennsylvania sided with the FTC, finding the rule a lawful exercise of agency authority.

As of August 20, the FTC cannot enforce the rule against any employer. According to the Texas federal court, the rule is an unlawful exercise of agency power because the FTC lacked statutory authority to promulgate the rule in the first place. The court further found the rule arbitrary and capricious. But rather than limit its decision to the parties in the lawsuit, like prior decisions, the court declared the rule unlawful and set it aside nationwide.

What This Means for Employers

The decision against the FTC is likely not the end of the noncompetition ban saga. The FTC has already indicated it is considering an appeal, where a federal appellate court could reverse the district court’s decision and reinstate the rule. That process could take years. For the time being, however, the FTC cannot enforce the rule and employers do not need to comply with it.

Although the FTC rule is no longer enforceable, the decision does not change preexisting state law. Employers should comply with applicable state laws around the making or enforcement of noncompetition agreements, including states with preexisting bans.

This update is prepared for the general information of our clients and friends. It should not be regarded as legal advice. If you have questions about the issues raised here, please contact any of the attorneys in our Labor & Employment Practice Group, or the attorney with whom you normally consult.

About Tonkon Torp
Tonkon Torp LLP is a leading business and litigation law firm serving public companies, substantial private enterprises, entrepreneurial businesses, and individuals throughout the Northwest. Tonkon Torp is celebrating its 50th year in business! See our History Timeline for more information, or visit tonkon.com.