Federal Judge In Texas Blocks FTC’s Noncompete Rule

A federal judge shot down the FTC’s rule banning noncompete agreements, a setback for the agency’s effort to free workers from restrictive employment contract terms.

The new rule makes existing noncompetes not enforceable, with one exception: Existing noncompete agreements for senior executives--or workers "earning more than $151,164 who are in a 'policy-making position'"--can stay in place.

As part of the FTC rule on noncompetes, employers were required to send notices to all employees and former employees who were subject to noncompetes to tell them they were released from the noncompete no later than September 4, 2024.

The FTC issued a rule banning noncompete clauses in employment contracts in the U.S. in April, and the action was immediately challenged in court. On Tuesday, Judge Ada Brown of the U.S. District Court in Dallas ruled that the FTC’s rule was “unreasonably overbroad without a reasonable explanation.”

Now, based on the Texas court’s final order concluding that the Noncompete Rule is “unreasonably overbroad and without reasonable explanation,” employers have some certainty for the foreseeable future. They are no longer required to notify current and former employees that their noncompetes are unenforceable – a deadline that was otherwise just a few weeks away.

The FTC will almost certainly appeal the ruling to the Fifth Circuit Court of Appeals. For the foreseeable future, however, employers can continue enforcing their noncompetes in accordance with state laws.

Still, the decision does not prevent the agency from addressing non-compete agreements through "case-by-case" enforcement actions, said Victoria Graham, an FTC spokesperson.

The FTC is also considering appealing the court's decision. The divergent rulings mean the issue could end up working its way to the U.S. Supreme Court.