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On August 20, 2024, a federal district judge in Dallas, Texas blocked the FTC’s rule banning non-compete agreements. That judge’s order applies nationwide. Where do we go from here?
At Gardner Employment law, we stay up to date on employment law, especially laws that are in flux. And we have previously followed the FTC’s non-compete ban, both in Texas and in Pennsylvania. Read on to learn what is in store for the FTC and the law of non-competes.
What Is the Status of the FTC’s Rule Banning Non-Competes?
U.S. District Judge Ada Brown entered a nationwide injunction preventing the FTC (Federal Trade Commission) from enforcing its rule banning non-competes. Judge Brown reasoned that the rule was overbroad and was “arbitrary and capricious.” The case, Ryan LLC v. FTC, centered around whether the FTC had the authority to impose such a sweeping ban. Judge Brown agreed with the plantiffs, Ryan LLC and the U.S. Chamber of Commerce, who argued that the FTC had exceeded its powers under the Federal Trade Commission Act. The court further stated that the FTC had failed to adequately justify why a national prohibition on non-competes was necessary.
The court emphasized that the FTC’s mandate to prevent “unfair methods of competition” did not extend to creating substantive rules like the non-compete ban. Instead, the court believed that the FTC’s power under the Act is largely procedural, meaning it cannot impose such sweeping regulations on private businesses without clear legislative backing. Moreover, Judge Brown criticized the FTC for its “one-size-fits-all” approach, which did not account for the varying needs and complexities across different industries and regions. Instead of targeting specific abusive practices, the FTC sought to ban nearly all non-competes without a clear framework for addressing legitimate business interests.
This ruling provides a significant reprieve for employers across the country who had been preparing for the September 4 deadline, the date when the FTC’s rule was set to go into effect. Prior to the ruling, many businesses were on the verge of notifying their employees and former workers that their non-competes were no longer enforceable, as required by the FTC’s rule. Now, with the rule set aside nationwide, employers can continue using non-competes under the previous legal standards, provided they comply with state-specific regulations.
How Does the Federal Court’s Order Against the FTC’s Ban on Non-Competes Impact Workers?
We are back to square one, although the FTC likely will appeal the lower court’s order, leaving us in uncertainty until the appellate court rules. In the meantime, with the nationwide injunction halting all aspects of the FTC’s rule, everyone must follow the law regarding non-compete agreements as it existed before the FTC’s ban. This means employers can continue using non-competes as they have in the past, so long as they comply with relevant state laws. Many businesses that were preparing to notify their employees and former workers that their non-competes were no longer enforceable, as mandated by the FTC, can now pause these efforts. The ruling relieves the immediate pressure to overhaul employment contracts in response to federal regulations.
For employees, this ruling brings mixed news. Those who had been hoping the FTC’s ban would free them from restrictive non-competes must now wait for further legal developments from the appellate courts. Workers bound by non-compete agreements will remain subject to their terms for the time being, unless their particular state laws provide protections or restrictions. In some states like California, non-competes are already prohibited, providing employees with greater freedom to change jobs or start their own businesses without the looming threat of litigation. However, in Texas and other states that enforce non-competes, this ruling means employees are still constrained by these agreements, limiting their mobility and career options. Violating a non-compete agreement could trigger a temporary restraining order against the worker, preventing him or her from working for a competitor.
As the legal process unfolds, both sides should remain vigilant and prepared for further changes.
What Comes Next?
The future of the FTC’s non-compete ban remains uncertain, and it is far from guaranteed that this is the final word on the matter. The U.S. Chamber of Commerce and other business groups have celebrated the ruling, viewing it as a victory against what they call “government micromanagement” of business decisions. However, if the FTC pursues an appeal, the issue will remain alive in the courts for months, if not years. An appeal of the Dallas federal court’s order will likely face an uphill battle because the conservative Fifth Circuit Court of Appeals, which tends to lean toward businesses’ interests, will decide the issue. And the possibility of the case reaching the Supreme Court is not off the table.
In a separate but related case, a federal court in Pennsylvania took a different stance in late July. There, U.S. District Judge Kelley Brisbon Hodge refused to grant an injunction against the FTC’s non-compete ban, noting that the FTC’s rule served to “prevent unfair methods of competition.” This ruling shows that the legal landscape around non-competes is still divided, and differing interpretations could emerge as the issue continues to be litigated across various jurisdictions. The order by the Pennsylvania court, which has the same power and authority as the federal court in Dallas, raises the legal issue regarding whether a federal district judge has the power to order everyone in the United States to follow its order. Only the United States Supreme Court can answer that question.
Contact An Expert.
For now, the FTC’s non-compete ban has been blocked, and all parties, employees and employers alike, must follow state laws governing non-competes. If you have questions regarding the future of the FTC ban on non-competes, fee free to give us a call.