Texas Court Orders A Nationwide Halt to FTC’s Ban on Non-Compete Agreements
On August 20th, a Texas federal court struck down the FTC’s ban on non-compete agreements that was scheduled to go into effect on September 4th. The most significant aspect of the Court’s decision is that it places a nationwide injunction on the FTC’s planned ban for non-competes, not just for the parties involved in the Texas litigation as had occurred in July. As a result, employers do not need to comply with any part of the FTC’s rule, including the requirement to send notices by September 4th to those current and former employees informing them that they would not be under the terms of non-competes due to the FTC’s ban on non-competes.
This decision is consistent with the Texas federal court’s earlier ruling in early July, which had temporarily blocked the FTC’s Final Rule from going into effect, but only for the named plaintiffs involved in that lawsuit. The Court’s new decision dated August 20 blocks the FTC’s Final Rule from going into effect on a nationwide basis for the duration of the lawsuit, unless a higher court modifies that ruling.
In striking down the FTC’s ban on non-competes, the Texas Court held that the FTC did not have the authority to issue the rule because Congress only authorized the agency to issue procedural rules to address unfair competition, not substantive rules. In ruling against the FTC, the Court stated, “The role of an administrative agency is to do as told by Congress, not to do what the agency thinks it should do.”
Additionally, the Court concluded that the FTC’s rule was “arbitrary and capricious” for numerous reasons, including that the ban was unreasonably overbroad, failed to consider the positive benefits of non-competes, and failed to sufficiently address potential alternatives rather than a nationwide ban on almost every non-compete in every business setting. The Court also criticized the FTC for failing to focus on harmful non-competes, rather than simply prohibiting all of them.
Many expect that the FTC will appeal the Texas court’s ruling and could even seek an emergency order from the appellate court asking that the FTC’s non-compete ban be allowed to take effect as scheduled notwithstanding the Texas Court’s ruling. However, the appellate court that would review an appeal and/or an emergency order request is the 5th Circuit Court of Appeals, which has a well-earned reputation of being extremely favorable to businesses.
Therefore, the likelihood that the 5th Circuit will issue an emergency order, if requested, is extremely minimal to non-existent. Indeed, the likely outcome of an appeal by the FTC regarding the Texas Court’s decision is that it will be affirmed. So, relief from the 5th Circuit Court of Appeals is extremely unlikely either before September 4th or sometime in 2025 when any appeal would likely be decided. Furthermore, the United States Supreme Court is likely to be just as unfriendly to the FTC as the 5th Circuit as the current majority has made it clear that it disfavors regulatory actions through the executive branch agencies when the legislative branch has not taken any action on a particular issue.
In sum, the likelihood that the FTC’s ban of non-competes will become a reality is extremely unlikely at best. So, employers that are still using non-compete agreements in its workplace are back to the status quo – meaning that they need to follow applicable state laws regarding restrictive covenants, including making sure that they are reasonable and not overbroad in their limits placed on employees. Also, certain states have prohibited non-compete agreements (California, Minnesota, Oklahoma and North Dakota), and numerous states have placed income threshold limits on whether a non-compete or non-solicit agreement can be used with certain employees (Illinois, Colorado, Virginia, Oregon and Washington plus others) or other restrictions on non-competes. Therefore, if an employer has employees in multiple states – including virtual employees – it is important to understand the applicable state law for that particular employee(s).
At this time, employers do not need to do anything differently regarding their non-competes as the FTC’s ban has no effect at all anywhere in the nation. However, if your business has not reviewed its non-competes in recent years to ensure that they are reasonable and focused in scope, now is a good time to do so. Additionally, due to the general trend at the state level against non-competes, many businesses are increasingly shifting to only use non-solicitation agreements to protect their customers and workforce, and non-disclosure agreements to protect their confidential information, rather than using non-competes at all. Such decisions must be made carefully based on your specific business circumstances, the nature of the particular employees’ positions, the industry in which your business operates, the State in which the employees are working, and other factors as well.
Please click here to learn more about the FTC’s Final Rule.
If you would like more information or have any questions, please reach out to Kai Hovden at ckh@dewittllp.com or Stephen DiTullio at sad@dewittllp.com.