In a big win for employers, a Texas federal court has blocked the FTC’s proposed ban on non-compete agreements across the United States. This ruling means that employers can continue to use non-competes under state laws, at least for now. While the FTC could still challenge the ruling in a federal appeals court, there’s no immediate need to comply with the rule that was initially set to take effect on September 4. Here’s what happened, why it matters, and what steps employers should take now.

The Background on Noncompetes and the FTC Rule

The FTC proposed a nationwide ban on non-compete agreements, arguing that they limit worker freedom, suppress wages, and stifle competition. Non-competes often prevent employees from working for competitors or starting their own businesses in the same industry for a set period after leaving a job. Although intended to protect business interests, the FTC viewed these agreements as overly restrictive, especially when applied to lower-level employees with little bargaining power.

But the proposed rule didn’t make it far. A group of employers, led by a Texas company, the U.S. Chamber of Commerce, and other business organizations, filed a lawsuit in federal court to prevent the rule from taking effect. They argued that the FTC had overstepped its authority. And a Texas federal judge agreed, putting a hold on the rule in a decision issued just weeks before the ban was set to begin.

The Judge’s Ruling

Judge Ada Brown of the Northern District of Texas found the FTC’s rule was an overreach in two main ways. First, she concluded that the FTC did not have the authority to issue such a sweeping ban. Second, she called the rule “arbitrary and capricious.” She argued that the rule was too broad, trying to apply a one-size-fits-all ban across all states.

Nationwide Implications

Judge Brown’s ruling applied her order blocking the rule to all employers nationwide. Initially, her July ruling only blocked the rule for the specific parties in the Texas case, but her final ruling extended the block across the country. Other federal courts had been divided on the rule’s legality, leaving many employers uncertain about the rule’s future. But now, with this ruling, the non-compete ban is set aside nationwide, and the FTC’s plans for enforcing the ban are halted.

The Impact of the “Chevron Doctrine”

The judge’s ruling reflects a recent shift in the judicial approach to agency actions, spurred by the Supreme Court’s recent decision to limit the “Chevron doctrine.” This doctrine had previously required courts to defer to federal agencies in interpreting ambiguous statutes. But now, courts are exercising more independent judgment when evaluating agency actions. Judge Brown’s decision cited this new standard, underscoring that agencies cannot stretch their powers beyond what Congress explicitly allows.

What’s Next for Employers?

While the FTC could appeal this decision, it faces tough odds. Any appeal would go through the business friendly Fifth Circuit Court of Appeals, which is unlikely to favor the FTC’s case. And even if it reaches the Supreme Court, the current judicial climate is skeptical of expansive agency regulations.

For now, employers can continue using non-compete agreements where state laws permit. However, it’s important to make sure your non-competes comply with state-specific restrictions. Here are a few practical steps employers can take in light of this ruling:

1. Review and Update Non-Competes: Confirm that your agreements comply with the laws of each state where you operate. Consider limiting non-competes to critical employees and adjusting agreements as needed.
2. Ensure State-Specific Compliance: If you operate in multiple states, make sure you keep up with each state’s requirements on restrictive covenants. Illinois, for example, recently enacted novel restrictions on non-competes and non-solicitation agreements.
3. Inventory Existing Agreements: Now’s a good time to compile a list of all active non-competes. Should the FTC’s ban make a comeback, having an organized inventory will simplify compliance adjustments if needed.
4. Monitor the FTC’s Actions: The FTC has indicated it may still pursue non-competes through individual enforcement cases. Stay updated on developments to avoid being caught off guard by any new actions the FTC might take.

For now, employers have more flexibility in managing non-competes, but keeping these agreements narrowly focused on key employees and consistent with state laws will protect against future challenges. This ruling has restored the status quo—for now—but the ongoing legal battles mean that non-competes will likely remain an evolving issue for employers.

Michael Boxerman has been selected to the 2024 Illinois Super Lawyers list for Franchise & Dealership Lawyers. Each year, no more than five percent of the lawyers in the state are selected by the research team at Super Lawyers to receive this honor. Super Lawyers, part of Thomson Reuters, is a rating service of outstanding lawyers from more than 70 practice areas who have attained a high degree of peer recognition and professional achievement. The annual selections are made using a patented multiphase process that includes a statewide survey of lawyers, an independent research evaluation of candidates and peer reviews by practice area. The result is a credible, comprehensive and diverse listing of exceptional attorneys. The Super Lawyers lists are published nationwide in Super Lawyers magazines and in leading city and regional magazines and newspapers across the country. Super Lawyers magazines also feature editorial profiles of attorneys who embody excellence in the practice of law.