Update On FTC’s Ban On Noncompetes

The Federal Trade Commission’s (FTC) new rule banning noncompete agreements goes into effect on September 4, 2024. You may remember, however, that the rule was subject to immediate legal challenges. One of those challenges has proven preliminarily successful at least for some employers. 

On July 3, 2024, a federal court in Texas stayed the FTC’s rule banning noncompete agreements. But the judge’s order applies only to the parties involved in the lawsuit – mainly the U.S. Chamber of Commerce and Ryan, LLC, a Texas tax firm. In addition to denying a nationwide stay of the rule, the judge did not extend her order to members of the U.S. Chamber of Commerce. 

Applying the Administrative Procedure Act, the judge ruled that the FTC does not have the authority to create substantive rules on unfair competition. Instead, the agency has the authority to create rules of procedure or practice. Pointing out that no state has ever enacted a non-compete rule as broad as the FTC’s ban, the judge further concluded that “there is a substantial likelihood the Rule is arbitrary and capricious because it is unreasonably overbroad without a reasonable explanation.” She also found that the FTC’s ban on noncompetes “is based on inconsistent and flawed empirical evidence, fails to consider the positive benefits of non-compete agreements, and disregards the substantial body of evidence supporting these agreements.” 

The judge issued a preliminary order postponing the effective date of the FTC’s rule for the parties to the lawsuit. But the case is not over. The order is a preliminary one; the judge will issue a further ruling in this case by August 30, 2024. It is possible, but certainly not guaranteed, that this further ruling may provide more definitive relief for Nevada employers or at least for members of the U.S. Chamber of Commerce.

We will continue to monitor this case and keep you informed of developments. In the meantime, if you have questions about noncompetition agreements or the FTC’s ban, please contact a KZA attorney.

KZA Employer Report articles are for general information only; they are not intended and should not be construed to be legal advice. Reading or replying to such articles does not establish an attorney-client relationship. In addition, because the subject matters and applicable laws discussed in Employer Report articles are often in a state of change and not always applicable to every type of business entity or organization, readers should consult with counsel before making decisions based on the same.