Federal Court in Texas Stays Effective Date of the FTC’s Ban on Noncompete Agreements

The United States District Court for the Northern District of Texas finally issued its long-awaited decision on the challenge to the Federal Trade Commission’s Final Rule effectively banning most forms of noncompete agreements.

In its decision granting the plaintiffs’ motion for a stay of the Rule’s effective date and preliminary injunction, the Court made two important rulings. First, the Court found that the FTC lacked substantive rule-making authority to issue the Rule in the first place under the plain text, structure, and history of the FTC Act. Second, the Court also found that even if the FTC did have the authority to issue the Rule, it did not do so properly under the Administrative Procedures Act. The Court found that the Rule was unreasonably overbroad without a reasonable explanation; failed to consider positive benefits of noncompete agreements and the body of evidence supporting these agreements; and, failed to consider parties’ reliance interests on their bargained-for noncompete provisions. In sum, the Rule was arbitrary and capricious.

However, the Court did not go so far as to issue a nationwide preliminary injunction or nationwide stay of the effective date of the Rule. Rather, the Court only stayed the effective date of the Rule – which was supposed to be Sept. 4 – and prohibited the FTC from enforcing the Rule against the specific plaintiffs in the case before it.

The Court intends to issue a final ruling on the validity of the Rule on or before Aug. 30.

While the Court’s decision is certainly welcome news for employers, this July 3 ruling is not the final word on the issue. The FTC could appeal the Court’s preliminary injunction ruling and seek a stay of that ruling. The Court could also issue a narrower ruling on the merits, broadening the scope of the injunction but not going as far as the parties have requested. And, the Rule is also being challenged in a federal court in Pennsylvania, which could rule differently, setting up the potential for the Supreme Court to weigh in on the issue. Finally, noncompetes are still being challenged and regulated elsewhere, including by various states and, more recently, the National Labor Relations Board. Employers should still seek advice and counsel when seeking to enter into new noncompete agreements or what to do in the face of this ruling and other regulations with their existing noncompete agreements.

Clark Hill attorneys will continue to monitor developments on the FTC’s noncompete ban and provide updates. Should you have any questions, please contact Vincent C. Sallan at vsallan@clarkhill.com or the Clark Hill attorney with whom you regularly work.

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