Client Update: Texas Court Strikes Down FTC Rule on Employee Non-Competes

Labor & Employment

We recently provided a Client Alert providing an update on the status of the Final Rule (the "Rule") issued by the Federal Trade Commission (the "FTC"), which would make most covenants not to compete between employers and their workers illegal and void. The Rule was to have gone into effect on September 4, 2024. However, on Tuesday, August 20, 2024, in an Opinion and Order, a Texas Federal District Court issued an order (the "Order") mandating that the Rule not be enforced or otherwise take effect nationwide. In setting aside the Rule, the Court found that the FTC exceeded its rulemaking authority in issuing the Rule and that the Rule was unlawful, arbitrary and capricious.

What Does this Mean for Employers?

The Rule would have prohibited most U.S. employers from entering into a non-compete clause with a worker, including employees and independent contractors, or from representing that a worker is subject to a non-compete clause. The Rule also would have required employers, by the effective date of September 4, 2024, to provide a written notice to current and former employees and contractors subject to non-competes, advising them that their non-competes are no longer valid or enforceable.

Because the Order set aside the Rule on a nationwide basis, the Rule will not go into effect on September 4 or thereafter, unless the Order is reversed or modified on appeal. As of now, employers will not be subject to the Rule's requirements and should not take any action mandated by the Rule, such as sending out the notices advising employees that their non-competes are void and unenforceable. As permitted by existing state laws, employers may continue to require workers to sign non-compete covenants and may bring legal action to enforce existing covenants.

For now, U.S. employers should continue their existing practices with regard to employee covenants not to compete. The Wyrick Robbins employment law team will continue to monitor the status of the Rule and will provide prompt notice if, on appeal or otherwise, the requirements of the Rule are revived.