As discussed in previous blog posts, the FTC has proposed a new rule, which would invalidate most non-compete agreements. See April 24, 2024, blog post here. However, a coalition of employers and business groups has challenged the new rule in federal court in Texas. On July 3, 2024, the court granted the plaintiff's motion for a preliminary injunction, staying the rule, as to the plaintiffs, until the court issues a final decision
To issue a preliminary injunction, a court is required to find: (1) a substantial likelihood of success on the merits, (2) a substantial threat of irreparable harm in the absence of preliminary relief, (3) that the balance of equities favors the plaintiffs, and (4) that the injunction serves the public interest. Here, the plaintiffs argued that the FTC acted without statutory authority, the rule is the product of an unconstitutional exercise of power, and the FTC's actions were arbitrary and capricious. See June 24, 2024, blog post here. The court found in favor of the plaintiffs on all of the factors, including that the plaintiffs are substantially likely to succeed on their arguments that the FTC exceeded its authority and that it acted arbitrarily and capriciously.
The court's stay of the new rule only applies to the plaintiffs in this case – not to employers in general. Therefore, unless the court issues additional orders, employers across the country may have to comply with the new rule when it becomes effective. That is currently scheduled for September 4, 2024.
However, the court has indicated that it will issue a final ruling on this issue by August 30, 3024, which could apply across the country. Employers and employees who are parties to non-compete agreements should monitor the court's activity carefully and be prepared to comply with the new rule if the court does not invalidate it. While the court's issuance of the preliminary injunction indicates that the court is likely to invalidate the rule, it is far from certain that its final decision will do so.
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