The Federal Trade Commission’s new rule banning most non-compete agreements has hit its first major legal obstacle after a Texas federal court issued a preliminary injunction, partially blocking the federal ban that was scheduled to take effect on Sept. 4, 2024.
In April 2024, the FTC issued the Non-Compete Clause Rule, which would effectively ban nearly all forms of non-compete agreements, including most existing non-competes, and require employers to notify their employees that their existing non-compete obligations were no longer enforceable. (Read our previous Adams and Reese client alert.)
In Ryan LLC v. Federal Trade Commission – a lawsuit joined on the plaintiff side by the U.S. Chamber of Commerce – Judge Ada Brown of the U.S. District Court for the Northern District of Texas issued a 33-page decision preliminarily enjoining the FTC Non-Compete Clause Rule, also known as the Final Rule.
Judge Brown declined to issue a nationwide stay of the Non-Compete Clause Rule and instead issued a limited injunction only prohibiting enforcement of the Final Rule against the litigation parties (Ryan LLC, The U.S. Chamber of Commerce, Longview, Tx. Chamber of Commerce, Texas Association of Business, and Business Roundtable).
Judge Brown made clear that she intends to rule on the full merits of the case –– including the validity and constitutionality of the FTC Non-Compete Rule –– by no later than Aug. 30, which is the week before the Final Rule is set to go into effect.
The opinion provides a first and strong signal that the FTC Final Rule may not pass judicial review by the courts. She offered a thorough explanation of the parties’ competing arguments and discussed the limited statutory authority granted to the FTC by Congress.
Judge Brown concluded that “the FTC lacks substantive rulemaking authority with respect to unfair methods of competition,” that the FTC “has exceeded its statutory authority in promulgating the Non-Compete Rule,” and that the legal challengers “are substantially likely to prevail on the merits of their challenge to the FTC’s Non-Compete Rule.”
Judge Brown also noted that the FTC Non-Compete Rule is “based on inconsistent and flawed empirical evidence” and “fails to consider the positive benefits of non-compete agreements.” She concluded that there is a “substantial likelihood that the [Non-Compete] Rule is arbitrary and capricious because it is unreasonably overbroad without a reasonable explanation” for why it is imposing such an expansive, “one-size-fits-all approach” to banning all non-competes.
Businesses should keep in mind that although the federal ban on non-competes may be shut down by the courts, there are some states with noncompete bans in place.
Regardless of which way the court rules next month, it is highly likely that the FTC Non-Compete Rule will be subject to further litigation and appeals.
