On August 20, 2024, a federal judge in Texas blocked a Federal Trade Commission (FTC) final rule from taking effect that would effectively ban most employee non-compete agreements. The rule, which was set to take effect on September 4, 2024, would have prevented employers from entering into or enforcing non-compete agreements with the vast majority of employees and required employers to provide written notice to current and former employees that their non-compete agreements are no longer valid.

The court’s 27-page opinion blocking the rule concluded that the “FTC lacks statutory authority to promulgate the Non-Compete Rule and that the Rule is arbitrary and capricious.” Specifically:

• The FTC exceeded its statutory authority in promulgating the Non-Compete Rule because it lacks substantive rulemaking authority with respect to unfair methods of competition; and

• The rule is arbitrary and capricious because “it is unreasonably overbroad without a reasonable explanation[;]” “is based on inconsistent and flawed empirical evidence, fails to consider the positive benefits of non-compete agreements, and disregards the substantial body of evidence supporting these agreements[;]” and “the FTC failed to sufficiently address alternatives to issuing the rule.”

Ultimately, the court “set aside” the Non-Compete Rule because it determined the FTC’s promulgation of the rule was an unlawful agency action, which means the rule will not be enforced or take effect on September 4, 2024 as anticipated.

Although the Non-Compete Rule has been set aside, the FTC has indicated it is considering a potential appeal and reminded employers that the decision does not prevent the FTC from addressing non-compete agreements through case-by-case enforcement actions. Thus, employee non-compete agreements will still face increased scrutiny. Accordingly, employers should undertake a careful of review of their non-compete agreements and other agreements containing restrictive covenants to ensure they are compliant with applicable federal and state law.