The ability of companies to use non-compete agreements has always been governed by states.  Some states like California, Minnesota, North Dakota and Oklahoma statutorily ban the use of non-competes.  Many other states, like New York, rely on court decisions which permit non-competes that are reasonably limited and rooted in a legitimate business need.  There is no federal law that addresses the enforceability of non-competes.  However, earlier this year the FTC adopted a new rule by a vote of 3-2 which prohibits employers from entering into non-compete agreements with employees and requires employers to rescind existing non-competes.  The FTC rule is scheduled to take effect on September 4, 2024, and applies to most businesses except those for which it lacks jurisdiction over like non-profit organizations, federal credit unions, banks and savings and loan institutions.

A lawsuit challenging the FTC rule was filed in the U.S. District Court for the Northern District of Texas by a local company and business advocacy groups including the U.S. Chamber of Commerce.  The core issue in the lawsuit is whether the FTC non-compete ban exceeds its rulemaking authority.  On July 3, 2024, the District Court sided with plaintiffs and issued a preliminary injunction prohibiting the FTC from enforcing the new rule.  However, the injunction is limited and only prevents the FTC’s enforcement of the rule against the named plaintiffs in that lawsuit.  Thus, the injunction does not directly impact other businesses in Texas or other states like New York.

Although the scope of the District Court’s ruling is limited, it has promised to enter a decision on the underlying merits by August 30, 2024, which could have national implications.  It is possible the District Court will issue a judgment that declares the FTC rule invalid.  If this occurs, the FTC will not be able to enforce its rule unless that decision is reversed on appeal.  Also, another lawsuit is pending in the Eastern District of Pennsylvania in which the court has promised to issue a decision by July 23, 2024.