On July 3, 2024, the U.S. District Court for the Northern District of Texas issued a limited stay and preliminary injunction of the Federal Trade Commission's (FTC) final rule making unlawful virtually all non-compete agreements. This is an important decision and a win for business groups seeking to invalidate the rule. However, it does not put an end to the rule, as the court specifically rejected the request by plaintiffs for a nationwide injunction, instead limiting the application of the stay and injunction to the plaintiffs in the action before the court. As a result, the FTC’s final rule is still set to take effect on September 4, 2024 against all other employers, although the court’s opinion casts significant doubt on the validity of the FTC’s rule and may provide a roadmap for future challenges.
The Court’s Decision
The court found the plaintiffs were likely to succeed on their two primary arguments. First, the court found that the FTC lacked the substantive rulemaking authority under Section 6(g) of the FTC Act to promulgate the rule prohibiting noncompetes. The court examined the FTC's historical and statutory authority and found no support for such authority in the legislative history or prior actions by the FTC. Second, the court held that the non-compete rule was arbitrary and capricious, and therefore violated the requirements of the Administrative Procedure Act (APA). The court found that there was no rational connection between the facts and the regulatory decision because of the lack of evidence as to why the FTC chose a sweeping prohibition against almost any non-compete rather than targeting specific, harmful non-competes.
Limited Scope of the Stay and Injunction
The court importantly limited the scope of the stay and the preliminary injunction, which accordingly applies only to the plaintiffs in the case before it – the U.S. Chamber of Commerce and a handful of other businesses and business associations. For those parties, the FTC’s rule will not take effect on September 4, 2024.
Notably, the court refused to extend the injunction to the members of the business groups, such as the U.S. Chamber of Commerce, finding insufficient support for standing. The court also specifically declined to issue a nationwide preliminary injunction.
What About Everyone Else?
For now, the rest of the country remains subject to potential enforcement of the non-compete rule on September 4, 2024, although the possibility remains of a motion for reconsideration on the scope of the injunction. In any event, the court has stated its intent to reach a final decision on the merits on or before August 30, 2024. Given its findings on the preliminary injunction, it seems likely the court will permanently enjoin the application of the rule – so the important question at that time will be on the scope of any injunction. It is possible that a final decision by the court could involve broader injunctive relief, particularly with the benefit of further briefing from the parties, which will surely address the issue. According to the plaintiffs’ initial briefing, ample authority exists for such a nationwide injunction.
In addition, there is one additional case currently pending to challenge the rule, in the U.S. District Court for the Eastern District of Pennsylvania. The court in that case is scheduled to rule on an injunction request by July 23, 2024. The possibility remains for that court to issue a broader injunction that could impact other employers.
What Next?
While the court’s decision did not grant certainty the way many employers were hoping, the court’s decision is extremely important as the first decision examining the FTC’s authority to issue the non-compete rule and ruling against the existence of such authority. Moreover, there is still time before the September 4, 2024 deadline for the rule to be struck down in its entirety. While employers may continue to wait to see how further developments play out, employers should at least begin to consider a contingency plan in the event the rule does go into effect in September. At a minimum, employers should proactively gather information about their use of non-competes so they have a good idea of which current and former employees are subject to restrictions that might be invalidated by the rule. Employers should also explore, with the help of counsel, alternative methods to protect their customer relationships and confidential information.
Opinions and conclusions in this post are solely those of the author unless otherwise indicated. The information contained in this blog is general in nature and is not offered and cannot be considered as legal advice for any particular situation. The author has provided the links referenced above for information purposes only and by doing so, does not adopt or incorporate the contents. Any federal tax advice provided in this communication is not intended or written by the author to be used, and cannot be used by the recipient, for the purpose of avoiding penalties which may be imposed on the recipient by the IRS. Please contact the author if you would like to receive written advice in a format which complies with IRS rules and may be relied upon to avoid penalties.
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