Texas Court Blocks Federal Non-Compete Ban, Setting Up Appellate Challenge

August 21, 2024

–Client Alert

Texas Court Blocks Federal Non-Compete Ban, Setting Up Appellate Challenge

The FTC’s near-total ban on non-competes was scheduled to take effect on September 4, 2024. With just weeks to go, a Texas court has set aside the rule and ordered that it will not take effect at all. (Earlier this summer, that same court issued a preliminary injunction against the ban, but the injunction was limited to that case’s named plaintiffs.)

Practical Results

For now, under federal law, employers may continue enforcing existing non-competes and requiring employees to sign new non-competes, and employers are no longer required to provide the written notification that would have been required by the FTC’s rule that non-competes are unenforceable. (Employers that changed their normal practices this spring or summer, in anticipation of the ban, should consult with counsel about next steps to ensure robust business protection.) Conversely, workers who were expecting relief from their agreements, and planned to join a competitor or launch their own business, remain limited by written agreements.

With the federal ban set aside (at least for now), the spotlight returns to the existing, complex patchwork of state laws. Employers and workers who have questions about enforceability of existing documents, or what remains possible for new agreements, should consult with counsel. Sullivan represents both employers and workers regarding restrictive covenants and other aspects of employment advising and litigation.

Upcoming Legal Developments

This decision will likely be appealed to the Court of Appeals for the Fifth Circuit, the appellate court that sits over the federal court that issued this decision. After the Fifth Circuit rules, the losing party could ask the Supreme Court to review the case.

The Supreme Court does not review every case submitted for review, but it is more likely to review cases when different federal circuits have reached different legal conclusions on matters of federal law. The Texas court acknowledged that, in an older decision, the federal appeals court in D.C. reached an opposite conclusion about the FTC’s authority. In its written decision, the Texas court did not acknowledge a contrary decision by a federal court in Pennsylvania earlier this summer. However, as we previously wrote (available here), this other court previously found that the non-compete ban was legitimate and enforceable. This conflict increases the chances that the Supreme Court would consider resolving the issue.

Employment & Benefits

Texas Court Blocks Federal Non-Compete Ban, Setting Up Appellate Challenge

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