On August 20, 2024, the United States District Court for the Northern District of Texas issued a nationwide ruling blocking the implementation of the final Noncompete Rule (the “Final Rule”). Prior to the court’s ruling on August 20, it preliminarily blocked the FTC from implementing or enforcing the Final Rule, but only against the named plaintiffs in the lawsuit. For more information on the final Noncompete Rule see FTC Final Noncompete Ban Rule.
Just 15 days shy of the effective date of the Final Rule, the court concluded in its opinion that:
(1) the FTC promulgated the Final Rule in excess of its statutory authority; and
(2) the Final Rule is arbitrary and capricious.
Importantly, the court’s opinion prohibits enforcement of the Final Rule nationwide, meaning that employers no longer need to prepare to comply with the Final Rule.
Scope of Relief: Relying on Section 706(2) of the Administrative Procedures Act, the court set aside the Rule and held it unlawful. Following precedent set by the United States Court of Appeals for the Fifth Circuit, the court’s ruling has “nationwide effect,” is “not party-restricted,” and “affects persons in all judicial districts equally.” Braidwood Mgmt., Inc. v. Becerra, 104 F.4th 930, 951 (5th Cir. 2024). Accordingly, the Final Rule, which was scheduled to go into effect on September 4, 2024, is entirely blocked by the court’s order.
Takeaways: Although other courts have examined the Final Rule at the preliminary stage, such as the United States District Court for the Eastern District of Pennsylvania (which found that the FTC did have substantive rulemaking authority to promulgate the Final Rule), the Northern District of Texas is the first court to render a full judgment on the enforceability of the Final Rule. The FTC has indicated that it will likely appeal the court’s decision. It may also engage in efforts to address non-compete agreements through case-by-case administrative adjudication. While any further effort by the FTC to block non-competes on a nationwide basis is uncertain, employers should remain mindful of state and local efforts to restrict non-compete agreements, which are increasing. Employers should continue to ensure their non-compete agreements or other restrictive covenants comply with applicable state and local law.
