Key Takeaways

• A federal judge has stayed enforcement of the FTC’s noncompete ban after finding the FTC likely did not have authority to issue its Final Rule.
• The ruling is preliminary and stays the enforcement of the Final Rule only as applied to the named plaintiffs. 
• A final decision on the merits is expected before August 30, 2024.

What Happened?
On July 3, 2024, Judge Ada Brown in the Northern District of Texas issued her highly anticipated decision in Ryan LLC v. FTC addressing plaintiff Ryan LLC’s motion for a preliminary injunction seeking to stay enforcement of the Federal Trade Commission (“FTC”)’s Final Rule largely banning employee noncompetes. In her 32-page opinion, Judge Brown found that the FTC did not have authority to issue its noncompete ban because the Final Rule was “unreasonably overbroad without a reasonable explanation.” Thus, as widely hypothesized by the legal community, the implementation of the Final Rule has been stayed by a federal court.

The scope of the stay, however, is not what was widely expected — a nationwide injunction — and is instead extremely limited. The opinion limits the injunction to only the named plaintiffs. Notably this does not even include members of the U.S Chamber of Commerce or the other organizations that intervened in the case as plaintiffs. The court indicated that it would issue a merits decision by August 30, 2024. It remains to be seen whether the court will take that final opportunity to extend the stay nationwide. 

What Does it Mean for Employers?
This decision, while helpful in that it confirms what most employers already believed — that the Final Rule is likely invalid — does not provide employers any reprieve from application of the Final Rule as of its September 4, 2024 effective date. However, there is still some hope for employers that wish to continue to utilize employee noncompetes. On July 10, 2024, the U.S. District Court for the Eastern District of Pennsylvania is set to hear a motion in another case (ATS Tree Services LLC v. FTC) seeking to stay the FTC’s Final Rule; that motion similarly seeks a nationwide injunction stopping the Final Rule from taking effect. Moreover, it is expected that there will be a flood of lawsuits seeking to enjoin the Final Rule in the wake of the decision in Ryan LLC, as employers across the country will seek to enjoin the rule as applied to them as well. Any federal district court can issue a nationwide injunction, and additional cases challenging the rule make it more likely one judge will decide a nationwide injunction is appropriate. 

However, as things currently stand, the FTC’s September 4, 2024 effective date remains in effect, and employers should begin preparing the required notices informing employees that their noncompetes are no longer in force. Employers should likely hold off on sending those notices until closer to the September 4, 2024 deadline, as there are still further opportunities for the FTC’s noncompete ban to be stayed nationwide, whether it be in Ryan LLC’s final disposition on August 30, 2024, in ATS Tree Services LLC, or some other yet-to-be-filed case.