Non-Compete Update: Texas Federal Court Considers A Challenge to the FTC Non-Compete Ban

On July 3, 2024, a Texas federal court granted a limited preliminary injunction partially blocking the Federal Trade Commission’s (“FTC”) highly controversial Non-Compete Rule (“Rule”). The Rule is currently set to go into effect September 4, 2024. This injunction is temporary and limited in scope for now.  It does, however, point to the likelihood of a permanent, nationwide injunction.  The Texas Court’s decision on the permanent injunction – along with its final analysis on the legality of the Rule – is expected in late August immediately before the Rule is supposed to go into effect.

Litigation challenging the Rule was expected after the FTC originally announced the “final” Rule on April 23, 2024. See generally SS+D Blog, “FTC issues Final Rule Banning Many Employment Non-Compete Clauses” (April 30, 2024). The Texas litigation was filed the same day.  There are currently at least three separate pending lawsuits challenging the FTC action.  The Texas plaintiffs seek to block the Rule on several grounds, including that the FTC exceeded its legal authority when it imposed the ban.

The Court’s July 3 decision, while only preliminary and temporary, is important because it hints at how the Court is leaning.   In its grant of temporary relief, for instance, the Texas Court indicated that the plaintiffs’ ultimate challenge is “likely” to succeed on the merits.  The Court emphasized that executive branch agencies do not have unlimited power to impose such a ban.  The Court assessed that the FTC ban could result in irreparable harm to the specific plaintiffs in the case as well as to the public, generally. The Court also noted that non-competes have long been legal and enforceable in most states.

While this preliminary injunction does not yet apply to the entire nation, it now seems far more likely that a permanent, nationwide injunction could be forthcoming. Even if the Texas Court imposes a nationwide ban in August, there is other litigation working its way through the federal court system.  Further, any lower court decision, regardless of which way it goes, would likely be appealed.  In other words, stay tuned.

In the interim, it is still advised that employers who rely on non-competes should evaluate whether there are other less restrictive options for protection of vital business interests. See generally SS+D Blog, “FTC issues Final Rule Banning Many Employment Non-Compete Clauses” (April 30, 2024).

By:  Karl R. Ulrich, Esq. and  Charlotte LeClaire, J.D. Candidate

For more information, please contact Karl Ulrich at 937.222.2052 or by email at kulrich@ssdlaw.com.

This material is not intended as legal advice and is for general informational purposes only.  Those seeking legal advice should consult directly with legal counsel regarding their specific facts and circumstances.