Courts Now Split on Enforceability of FTC Noncompete Rule

On July 23, 2024, the Eastern District of Pennsylvania denied a company’s motion to enjoin the enforcement of the FTC’s rule banning nearly all noncompetes. This contradicts the Northern District of Texas’s order on July 3, 2024, which granted a preliminary injunction enjoining the rule as it applies to the plaintiffs in that case. With opposing rulings, employers remain in limbo as the rule’s September 4, 2024 enforcement date approaches.

What happened?

As we previously explained, in April the FTC issued a final rule banning nearly all noncompete agreements for workers, including both employees and independent contractors, and multiple legal challenges were launched almost immediately. As we described here, on July 3, 2024, a federal court in Texas granted a preliminary injunction enjoining the rule’s enforcement only as to the plaintiffs in that case. The Texas court held that the plaintiffs in that case are substantially likely to succeed on the merits of their argument that the rule is unenforceable and that they would suffer irreparable harm if the rule goes into effect.

On July 23, 2024, a federal district court in Pennsylvania parted ways with the Texas court and denied a company’s motion to suspend enforcement of the FTC’s rule. The plaintiffs had asked the Pennsylvania court to prevent the rule from going into effect while their lawsuit challenging the FTC’s authority to issue the rule is ongoing, but the court declined to do so and preliminarily ruled that the near complete ban on noncompetes is likely within the agency’s power. The Pennsylvania and Texas courts have essentially reached opposite conclusions on whether the FTC had the authority to issue the rule and whether the plaintiffs in each case would suffer irreparable harm from having to comply with the rule while litigation plays out.

How does this affect enforcement of the FTC’s rule?

The FTC’s rule remains set to go into effect on September 4, 2024, and with these opposing district court rulings, employers remain in limbo. Because the Texas court limited its ruling to the plaintiffs in the case before it, as of now, the FTC will be able to enforce the rule against any other employer beginning September 4.

What’s next?

Appellate challenges in both cases to the Third and Fifth Circuit Courts of Appeals are expected. Ultimately, the enforceability of the rule will most likely be decided in the Supreme Court.

The Third or Fifth Circuit could still stay enforcement of the rule while these legal proceedings work their way through the courts, but, as demonstrated by the district courts’ opposing rulings, at this point it’s unclear what either circuit will do. If you have noncompete agreements with any of your workers, Stites & Harbison’s attorneys have knowledge and expertise to help you navigate this uncertain legal landscape.