Recent limited ruling by Texas court puts the FTC Non-Compete Rule in doubt

In a decision that employers across the country have anxiously awaited, the Northern District Court of Texas issued a ruling on July 3, 2024, on the Federal Trade Commission’s broad Non-Compete Rule that would ban most non-compete agreements. While the court found that the FTC lacks the authority to ban all non-compete agreements, at this point the court’s decision stops short of issuing a nationwide injunction that would fully halt the Rule.

The court’s much anticipated ruling comes in a consolidated case brought by an individual business, Plaintiff Ryan LLC’s (Ryan), and various business associations, including the Chamber of Commerce of the United States of America, Business Roundtable, Texas Association of Business, and Longview Chamber of Commerce’s (“Plaintiff-Intervenors” - collectively with Ryan known as “Plaintiffs.”) The court’s order grants the Plaintiffs’ Motion for Stay of Effective Date and Preliminary Injunction against the FTC’s Rule (click here to read the preliminary injunction and ruling), but, significantly, limits that decision to the Plaintiffs in the specific case under consideration.

As explained in McDonald Hopkins’ previous alerts on the topic, the Rule is set to take effect on September 4, 2024, effectively banning most non-competition agreements with few exceptions. While the Texas court found that the FTC lacks substantive rulemaking authority with respect to unfair methods of competition and granted the motion as applied to Ryan and certain Plaintiff-Intervenors, the court did not enter a nationwide injunction. As a result, the Rule is still set to go into effect as to most employers on September 4. The court intends to rule on the ultimate merits of the action on or before August 30, 2024, so there is still a strong possibility of a nationwide injunction being issued

Even though the court’s order is limited to Ryan and the Plaintiff-Intervenors, the order is a positive sign that the court may hold the Rule unenforceable and invalid by August 30. The court has requested additional briefing on whether a nationwide injunction is warranted and whether the Plaintiff-Intervenors has “associational standing” such that they may seek relief for each of their members.  

Businesses and employers: Still plan for non-compete ban effective September 4

As a result of the limited scope of the injunction, for now, businesses and employers still need to plan for the Rule’s potential effective date on September 4, 2024. This means you should begin:

1. Identifying the universe of employees and former employees who may need to be notified that their non-compete agreements are no longer enforceable;
2. Identifying senior executives who are not subject to a non-compete, but who could be asked to signed one before September 4;
3. Updating restrictive covenant agreements to ensure that non-solicitation and confidentiality language is appropriate and enforceable.

McDonald Hopkins has detailed information on these steps available here.

Moving forward, the courts may very well expand the scope of the injunction to further delay the implementation of the Rule for a broader number of businesses/employers. However, for now, most businesses still need to be preparing for the September 4, 2024 effective date. Given employers’ continued uncertainty surrounding the FTC’s sweeping Non-Compete Rule if you have questions regarding the Rule or your company’s current suite of restrictive covenants, contact your McDonald Hopkins attorney or any member of McDonald Hopkins' Trade Secret, Non-Compete, and Unfair Competition team.

We will continue to monitor developments and keep employers updated.