In a decision that prolongs national uncertainty about the Federal Trade Commission’s non-compete ban, a federal court in Texas has entered a preliminary injunction postponing the effective date of the ban and barring the FTC from implementing or enforcing it—but only for the plaintiffs in that specific case. The narrow scope of the decision creates a state of uncertainty for the FTC, businesses that use non-competes, and workers subject to non-competes.

The Non-Compete Ban

The FTC’s non-compete ban is scheduled to take effect on September 4, 2024. It will abolish the vast majority of non-compete agreements, and it will require employers to provide notice to workers that their non-competes are no longer valid. (For more on the non-compete ban, see our prior client alert, available here).

The Decision

The federal court (i) found that the FTC lacked the authority to enact the non-compete ban; (ii) found that, even if the FTC had broader authority, the non-compete was “arbitrary and capricious” and therefore invalid; and (iii) entered injunctive relief that was limited to the plaintiffs in that case.

The FTC Act empowers the FTC to prevent two categories of misconduct: unfair methods of competition in or affecting commerce (the foundation of the non-compete rule), and unfair or deceptive acts or practices in or affecting commerce. The FTC Act specifically empowers the FTC to issue substantive rules defining unfair or deceptive acts or practices. The FTC Act does not, however, clearly give the FTC the power to issue substantive rules defining unfair methods of competition. The FTC argued that it implicitly had this authority through another provision of the FTC Act that provides additional rulemaking authority. The court disagreed. It held that this provision merely allows the agency to create rules for its own procedure and practice; it does not give the agency broader authority to regulate the public.

Next, the court separately found that the non-compete ban was arbitrary and capricious, and therefore invalid. The court characterized the rule as “a one-size-fits-all approach with no end date” and criticized the FTC for (in its view) insufficiently considering other ways to address specific, harmful non-competes. Interestingly, the court appears to have relied upon its understanding that “no state has ever enacted a non-compete rule as broad as the FTC’s Non-Compete Rule”; multiple states do have near-total bans of non-competes, including California, a state with a labor force of over 19 million people.

The court found that Injunctive relief was appropriate to prevent the plaintiffs from suffering harm from the non-compete ban. However, relying on recent precedent from the Fifth Circuit (the court of appeals that controls it), the court limited this relief to the plaintiffs before it, expressly declining to apply the injunction nationwide.

What Comes Next

The court has required the parties to submit a joint status report on July 9, 2024, which will set deadlines for—among other things—further briefing by the parties. The court stated that it intends to make a final decision on the merits of this case on or before August 30, 2024.

It is possible that the court could enter a permanent injunction broader than the preliminary injunction, but employers and employees should expect that unless something drastic changes, the FTC ban will be in effect starting on September 4, 2024. That said, this decision, and briefing by the plaintiffs and numerous non-parties who filed papers as amicus curiae, provides a roadmap for other employers who may want to challenge the non-compete ban, either preemptively or in response to an enforcement action.