By: Jocelyn McKenzie and Joe Kirkwood
The U.S. District Court for the Northern District of Texas has blocked FTC’s nationwide ban on non-compete clauses, just two weeks before it was set to take effect on September 4, 2024.
If you haven’t read our last article on the Federal Trade Commission’s (FTC) Final Rule on non-competition agreements issued on April 23, 2024, the Rule would have explicitly interpreted Section 5 of the FTC Act to mean that entering into, enforcing, or representing that a worker is subject to a non-compete is an unfair method of competition in violation of the Act.
On August 20, 2024, after months of litigation concerning, among other things, the constitutionality of the Rule, Judge Ada Brown found that the FTC had overstepped its authority, ruling that the ban was “arbitrary and capricious” due to its broad, “one-size-fits-all" approach without sufficient evidence to justify it. Therefore, the Court granted an injunction preventing the Rule from taking effect. This means that not only will it not take effect in the immediate future, the likelihood that it will ever take effect is now also uncertain.
For businesses that find non-compete agreements to be vital for protecting their legitimate business interests, including sensitive information, intellectual property, and client relationships, this ruling is a victory. However, the battle is not over. While the FTC will most likely appeal this ruling, conflicting rulings from courts in the Eastern District of Pennsylvania and the Middle District of Florida point to differing opinions throughout the federal legal system that will need to be resolved by a higher court. Moreover, state legislation across the country continues to trend toward banning or greatly restricting the use of non-competes, with many states relevant to our clients already banning or refusing to enforce them.
As we’ve consistently advised, in many industries, well-crafted non-solicitation clauses and non-disclosure agreements offer sufficient protection for businesses without conflicting with shifting legal standards. At NOVA Business Law Group, LLP, we are deeply experienced in business law and routinely provide reasoned, long-term guidance on strategy regarding issues like these. We invite you to contact us to review your current agreements and proactively prepare for future changes.