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Litigation & Employment

Federal Court Blocks Federal Trade
Commission’s Non-Compete Ban

08/28/2024

In April of this year, the Federal Trade Commission (“FTC”) issued a rule (“Final Rule”)
that would have effectively banned employers from enforcing non-competition provisions in contracts with their employees. That rule was originally set to take effect on September 4, 2024. If the Final Rule had become effective, almost all non-compete agreements would have been barred and categorized as an unfair method of prohibiting competition under Section 5 of the FTC Act. Employers would have been required to issue notice to all non-senior executive employees bound by a non-compete agreement, informing them that those agreements were no longer enforceable. Employers would also have been required to stop using non-compete agreements going forward.

The Final Rule was challenged in several federal courts, but until last week it was still on
track to go into effect. However, on August 20,
2024, a Texas federal judge blocked enforcement of the Final Rule on a nationwide basis.
The court determined that the FTC violated the
Administrative Procedure Act (“APA”) because
“[1] the FTC exceeded its statutory authority in
implementing the Rule, and [2] the Rule is arbitrary and capricious.” As a result, the Final Rule
will not go into effect as scheduled.

The ruling hinges on the U.S. Supreme Court’s
decision this summer in Loper Bright Enterprises
v. Raimondo, which adopts a wholly new
approach to assessing agency rule making of the
sort at issue here. Prior to Loper Bright, courts
were directed to show significant deference to
the agencies promulgating these rules. Now,
the Supreme Court has directed lower courts
to exercise their own judgment in assessing the
legitimacy of agency rules. Consequently, the
FTC’s Final Rule – already an aggressive exercise in agency authority – was made much more
vulnerable to legal challenge.

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This Texas ruling will likely be appealed by the FTC, but such an appellate process could
take months or years. For now, there is no federal prohibition against employers using noncompete agreements, and they do not need to give notice to employees regarding the effectiveness of such agreements. Employers should note that some states, including Massachusetts, restrict the use of non-compete provisions, and this recent federal district court decision does not impact their enforceability. Employers or employees with questions about the use of restrictive covenants such as non-competes
should reach out to an attorney at Gesmer Updegrove.

This advisory is for information purposes only and does not constitute legal advice. If you would like to discuss the impact of the new federal district court ruling or the FTC Final Rule, please contact our team of attorneys.

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