Challenge Denied: District Court Rules That FTC's Impending Nationwide Ban on Noncompetes Is Unlawful and Blocks Its Implementation

As previously alerted, the Federal Trade Commission (FTC or Commission) voted 3-2 this past April to publish and issue a final rule that (1) bans for-profit employers from entering into agreements with workers that impose a restriction on their ability to compete with the employer (Noncompetes), and (2) prevents employers from enforcing existing Noncompetes against most workers (Final Rule). This nationwide ban was set to take effect on 4 September 2024.

However, on 20 August 2024, the US District Court for the Northern District of Texas set aside the FTC’s Final Rule as an unlawful agency action and held that the Final Rule shall not be enforced or otherwise take effect on 4 September 2024 or thereafter. Unlike prior rulings on the Final Rule by this and other courts, the August 20 ruling was not limited to the named plaintiffs that challenged the FTC’s Final Rule. Instead, the court’s ruling has a nationwide effect, meaning that the FTC is prohibited from enforcing the Final Rule, which will no longer take effect next month.

Specifically, the court concluded that (1) the FTC exceeded its statutory authority in promulgating the Final Rule and (2) the Final Rule is arbitrary and capricious—and that the Final Rule would cause irreparable harm, and thus its implementation and enforcement must be enjoined. The case is Ryan LLC v. FTC, Case No. 3:24-cv-00986 (N.D. Tex. Aug. 20, 2024).

Key Takeaways for Employers

• Federal regulation banning Noncompetes will not be enforced or otherwise take effect on 4 September 2024 or thereafter unless this ruling is overturned on appeal. While it is likely that this ruling will be appealed, existing and otherwise enforceable Noncompetes will remain in effect until further notice, and employers may still enter into valid Noncompetes with future employees.
• Enforceability of Noncompetes is determined by state and local law and not the FTC Final Rule. Employers should therefore continue to review Noncompetes for compliance with all state and local laws and be aware of other federal and state agency initiatives that target unfair employment practices.  

The firm's Labor, Employment, and Workplace Safety practice and Antitrust, Competition, and Trade Regulation practice will continue to monitor further legal developments with regard to the FTC Final Rule.