Federal Court Blocks Non-Compete Ban

In April 2024, the Federal Trade Commission (FTC) introduced a rule to ban nearly all non-compete agreements for employees nationwide, set to take effect in September. However, on August 20, 2024, a federal court in Texas issued an injunction blocking the rule, stating that the FTC exceeded its authority. This decision means employers can continue using non-compete agreements for now, though the FTC may appeal. Employers are advised to review their agreements to ensure compliance with current regulations and stay informed on state laws to be aware of potential future changes.

The rule and its background

In April 2024, the FTC announced a groundbreaking rule that would ban nearly all non-compete agreements for employees across the United States. Set to take effect on September 4, 2024, this rule aimed to dramatically reshape how businesses manage employment contracts, potentially invalidating millions of existing agreements. The rule had a few exceptions, such as for senior executives, but it was designed to create a near-universal ban on non-competes.

Non-compete agreements have long been used by businesses to prevent employees from joining competitors or starting competing ventures. While some states have imposed restrictions on these agreements, the FTC’s rule would have implemented a comprehensive ban, requiring employers nationwide to rethink how they protect their business interests.

The recent court ruling

On August 20, 2024, a federal court in Texas issued a nationwide injunction blocking the FTC’s rule from taking effect. The U.S. District Court for the Northern District of Texas ruled that the FTC exceeded its statutory authority by attempting to enforce a broad ban on non-competes. Judge Ada E. Brown found the rule to be arbitrary and capricious, stating that the FTC did not have the authority to issue such substantive regulations.

The case, Ryan LLC et al. v. Federal Trade Commission, was initiated by a Texas-based tax preparation company and supported by the U.S. Chamber of Commerce. The court’s decision, which followed an earlier order in July 2024 that temporarily blocked the rule, was not unexpected.

What this means for employers

For now, the injunction means there is no nationwide ban on non-competes. Employers may continue to use non-compete agreements as they have been, at least until further legal developments occur. However, the FTC has indicated it may appeal the decision, and the U.S. Supreme Court could ultimately determine the rule’s fate.

Given the uncertainty, employers should remain vigilant. It is essential to stay updated on state-specific laws regulating non-competes, as some states may introduce new legislation in response to the federal situation. Additionally, the FTC may still pursue case-by-case enforcement actions, so businesses should carefully review their existing non-compete agreements to ensure they are legally sound and aligned with business needs.

Next steps for employers

Employers should take this time to review and possibly refine their non-compete agreements, considering both current state laws and the potential for future changes. It is advisable to limit the use of non-competes to key employees and ensure that any restrictive covenants are narrowly tailored to protect legitimate business interests without overreaching.

As the legal landscape continues to evolve, staying informed and proactive will be crucial for employers to navigate the complexities surrounding non-compete agreements. We are closely monitoring this situation and will provide updates as new developments arise.

For more information

If you have any questions, please contact our HR team at 210–775–6082, toll-free at 1–888–757–2104, or HR@gbizadvisors.com.