A federal district court in Texas has set aside the Federal Trade Commission’s (FTC) final rule that bans most noncompetition agreements (the Noncompete Rule). The final rule was scheduled to go into effect on September 4, 2024, but the court’s order indefinitely sets aside the rule and prohibits the FTC from enforcing it. 

The Noncompete Rule defines noncompetition agreements as any “term or condition of employment that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from: (i) [s]eeking or accepting work in the United States with a different person where such work would begin after the conclusion of the employment that includes the term or condition; or (ii) [o]perating a business in the United States after the conclusion of the employment that includes the term or condition.” Unless one of the narrow exceptions applies, an employer must “provide clear and conspicuous notice to the worker . . . that the worker’s non-compete clause will not be, and cannot legally be, enforced against the worker” by the effective date of September 4, 2024.

The same day the Noncompete Rule was announced, Ryan, LLC, a global tax services and software provider that uses noncompetes with its shareholder principals and certain other employees with access to particularly sensitive business information, filed a lawsuit in federal court in Texas to stay the rule’s effective date and stop the FTC from enforcing the rule. Several other parties, including the U.S. Chamber of Commerce, joined the lawsuit challenging the Noncompete Rule. Yesterday, the federal court agreed with the plaintiffs’ arguments and ruled, among other things, that the FTC lacked the authority to issue binding regulations defining “unfair methods of competition” and that the rule otherwise exceeds the FTC’s authority.

While the FTC is likely to appeal, for the time being, employers need not comply with the Noncompete Rule and its requirements effective September 4, 2024. Nonetheless, employers should continue to evaluate the enforceability and legality of existing noncompetition agreements. Many states have enacted laws to prohibit noncompetition agreements. Other federal agencies have also issued guidance that these agreements are unenforceable and unlawful. For example, the National Labor Relations Board’s General Counsel issued a memorandum in 2023 explaining that noncompetition agreements between employers and employees are unfair labor practices under the National Labor Relations Act. Employers with noncompetition agreements with employees should review our summary of the current legal landscape concerning noncompetition agreements and consult with an employment attorney on strategies for protecting against unfair competition and misappropriation of trade secrets. If you have questions regarding this ruling or noncompetes, please contact our Labor & Employment Practice Group.