As reported in previous posts, on April 23, 2024, the Federal Trade Commission (FTC) issued a final rule that generally prohibits covenants not to compete (Rule). The rule was set to become effective September 4, 2024. See FTC’s Non-Compete Rule Affecting Executive Compensation Challenged in Courts. The Rule was immediately challenged in courts. On July 3, 2024, the United States District Court for the Northern District of Texas issued a preliminary injunction preventing the rule from being enforced against the Plaintiff in that case before the merits of the case were decided. However, the court refused to expand the injunction to all employers nationwide on a motion for reconsideration on July 10, 2024. See Court Denies Expanding Preliminary Injunction on FTC Non-Compete Rule. The court stated it would provide its decision on the merits of the case by August 30, 2024.

Meanwhile, two other cases had been filed, challenging the Rule. One was filed in a Pennsylania District Court and the other in a Florida District Court. On August 15, 2024, the Florida court agreed with the Northern District of Texas and issued a preliminary injunction against enforcement of the Rule against the Plaintiff until the court decides the merit. Like in Texas, the injunction only applies to the Plaintiff in the case. However, on July 23, 2024, the Pennsylvania District Court denied a preliminary injunction, finding that the Rule was likely valid.

On August 20, 2024, the Texas court issued its decision on the merits, finding that the FTC over stepped its authority in issuing the rule and that the Rule was arbitrary and capricious. Importantly, the court ruled that the Rule is set aside on a nationwide basis. The court rejected the FTC’s argument that the decision should be limited to the Plaintiffs bringing the case.

Employers can breathe a sigh of relief that the Rule will not go into effect on September 4. However, the FTC is likely to appeal the Texas court decision. Additionally, once the Pennsylvania District Court decides the merits, it is likely to uphold the Rule. If that decision is then appealed, there could be a split in the Appellate Circuit Courts that could set up the matter for review by the U.S. Supreme Court. California Employers should also remember that California state law prohibits covenants not to compete, with certain exceptions.