Federal Court Strikes Down FTC's Noncompete Clause Rule

Earlier this year, we discussed a new rule issued by the FTC regarding non-compete clauses. Today's episode will serve as an update of sorts as we dig into a recent decision handed down by a federal court in Dallas and how it will impact this rule.

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About the authors:
John E. Pueschel|
Richard J.R. Raleigh, Jr.
Lee K. Van Voorhis
Jeffrey S. Whittle

Transcript

Welcome to Womble Perspectives, where we explore a wide range of topics, from the latest legal updates to industry trends to the business of law. Our team of lawyers, professionals and occasional outside guests will take you through the most pressing issues facing businesses today and provide practical and actionable advice to help you navigate the ever changing legal landscape.

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Earlier this year, we discussed a new rule issued by the FTC regarding non-compete clauses. Today's episode will serve as an update of sorts as we dig into a recent decision handed down by a federal court in Dallas and how it will impact this rule.

Following our April 25th, 2024, Client Alert regarding the Federal Trade Commission's new rule on non-competes, a federal court in Dallas, Texas, has blocked the FTC's attempt to ban most employment non-competes across the United States. Although an appeal by the FTC is anticipated, the rule will not take effect in September, allowing businesses to continue using non-compete agreements as per current laws.

In a case in the Northern District of Texas, U.S. District Court Judge Ada Brown granted summary judgment, focusing on the FTC's authority over employer/employee non-compete agreements. Judge Brown determined that the FTC exceeded its statutory authority and found the rule arbitrary and capricious. She highlighted that the FTC lacks the mandate to create substantive rules about unfair competition methods.

The rule required employers to inform current and former employees that their agreements were no longer enforceable, scheduled for September. However, the ruling effectively bans enforcing this requirement, providing clarity for businesses.

Judge Brown's decision benefits an accounting firm and several business groups, including the U.S. Chamber of Commerce, ruling that the order has nationwide implications. She set aside the rule entirely, preventing its enforcement.

The FTC is considering appealing, with a spokesperson expressing their commitment to combating non-competes through case-by-case actions. Meanwhile, other federal challenges are pending, and a Pennsylvania court had previously upheld the rule. These conflicting decisions suggest that further appeals are likely. 

The appeals process could take several years, but the outcome of the Rule might hinge on the 2024 presidential election. If the Democrats win in November, we expect the FTC to continue its appeal and possibly explore other ways to regulate or enforce restrictions on non-compete agreements. However, if the Republicans win, it's uncertain whether the FTC, likely comprising a 3-2 Republican majority, would continue with an appeal or pursue similar regulatory or enforcement actions in the future.

Meanwhile, businesses can rely on the Texas federal court's decision while awaiting appeal results. This allows businesses to continue to create and enforce non-compete agreements with employees, adhering to existing state laws. It's crucial to remember that this decision does not alter current state laws. Many states already have strict limits on non-compete agreements in employment, and a few, like California, prohibit them entirely.

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