The Federal Trade Commission’s efforts to ban noncompete agreements suffered a serious blow when a federal judge in Texas issued a nationwide injunction blocking the ban’s enforcement. Implementation of the ban could disrupt the delicate balance within the franchising industry. Franchise agreements often rely on noncompete clauses to safeguard business models, maintain brand consistency, and protect intellectual property. Without these protections, franchisors might face increased risks of competition from former franchisees, potentially diluting the brand’s value and undermining the entire franchise system.
On August 20, 2024, the United States District Court for the Northern District of Texas issued an order setting aside the FTC’s ban on employee noncompetes (the “Noncompete Rule”) on a nationwide basis. The court held the Noncompete Rule was improperly overbroad and in excess of the agency’s statutory authority.
Earlier this summer, another federal court in Pennsylvania sided with the FTC, finding the Noncompete Rule to be a valid exercise of the FTC’s authority. Most recently, on August 14, 2024, the Middle District of Florida sided with the Texas court and similarly limited its order blocking the Noncompete Rule to only the specific plaintiff in the case. These inconsistent rulings left employers in a state of complete uncertainty, not knowing whether their noncompete agreements were enforceable or not.
Now, based on the Texas court’s final order concluding that the Noncompete Rule is “unreasonably overbroad and without reasonable explanation,” employers have some certainty for the foreseeable future. They are no longer required to notify current and former employees that their noncompetes are unenforceable—a deadline that was otherwise just a few weeks away.
The litigation over the Noncompete Rule will likely continue. The FTC will almost certainly appeal the ruling to the Fifth Circuit Court of Appeals. For the foreseeable future, however, franchise systems should maintain their noncompete agreements in accordance with applicable state laws.
