Texas Court Challenges FTC’s Employment Noncompete Ban

The Fredrikson law firm discusses the recent decision by the U.S. District Court for the Northern District of Texas, which challenged the Federal Trade Commission’s (FTC) employment noncompete ban. While the court’s ruling paused the ban’s enforcement for some challengers, it did not strike it down completely.

The FTC issued a rule banning new noncompetes and requiring employers to inform non-senior executives that their noncompetes are unenforceable. The Texas federal court was the first to challenge this rule, deciding whether to temporarily halt its enforcement. The court’s task was to determine if the challengers were entitled to an injunction during the early stages of the case.

The court ruled that the FTC lacked the authority to issue such a rule. It stated that the rule is likely arbitrary and capricious due to its broad scope without reasonable explanation. The ruling heavily relied on the recent Supreme Court decision rejecting “Chevron deference,” which previously allowed courts to defer to administrative agencies’ legal interpretations. The court found that the text of the FTC Act did not support the FTC’s authority to issue a substantive rule regarding “unfair methods of competition.”

The court decided not to extend the injunction nationwide and did not apply it to members of the U.S. Chamber of Commerce and other associated challengers. The injunction was limited to specific challengers who met the court’s high bar for preliminary relief. As a result, the enforcement of the employment noncompete ban is only paused for these parties.

The FTC rule is set to take effect on September 4. Further rulings from the Texas federal court and a Pennsylvania federal court are expected soon, which could lead to appeals and potentially broader impacts. The Texas court is expected to issue a final order by August 30, and a preliminary injunction ruling is anticipated from the Pennsylvania court by the end of July. These upcoming decisions could change the landscape of the rule’s enforcement.

The article suggests employers should distinguish between compliance with the new noncompete ban and the notice requirement for existing noncompetes, possibly delaying notifications to avoid retractions if the situation changes. In light of the growing opposition to such agreements, they should re-evaluate their use of noncompetes, especially for roles other than senior executives.