The July 3rd order was issued in the case of Ryan, LLC v. Federal Trade Commission, (“Ryan, LLC”) in which the plaintiff, Ryan, LLC, a tax firm, brought suit against the FTC with the backing of the U.S. Chamber of Commerce, and others, including two Texas trade associations. The Court’s order, issued just two months before the Final Rule was set to take effect on September 4, 2024, comes with two significant caveats:

1. First, it is applicable only to the plaintiffs in the Ryan, LLC litigation, as the Court declined to impose a nationwide injunction without further briefing from the parties as to why such nationwide injunctive relief would be necessary to the plaintiffs at a preliminary stage.
2. Second, the order left open the possibility of a nationwide injunction as the Court signaled an intent to rule on the merits of the case on or before August 30, 2024. Yet as written, the order leaves the Final Rule intact for all other employers beyond those named as plaintiffs in the pending action.

In its lawsuit, Ryan, LLC argued that the FTC had transgressed its authority by issuing the Final Rule, and contended that the non-compete ban would cause irreparable harm to businesses by jeopardizing confidential and proprietary information and allowing employees with access to such information to be poached by others, including competitors. The Ryan, LLC plaintiffs sought to stay the effective date of the Final Rule.

The Texas Court held that the plaintiffs were likely to prevail on the merits of their claims. It reasoned that Section 6(g) of the FTC Act does not grant the FTC the authority for “substantive rulemaking,” such as the Final Rule, but rather limits it to issuing “housekeeping rules” necessary to prevent unfair competition. As a result, the Court concluded that the FTC lacked the authority to issue the Final Rule in the first place. The Court further criticized the FTC for adopting a “one-size-fits-all approach with no end date,” without adequately considering alternative, less restrictive measures and reasoned the Final Rule is arbitrary and capricious because it is “unreasonably overbroad without a reasonable explanation.” As such, the Court found that Ryan, LLC and the other plaintiffs in the case had shown a likelihood of success on the merits.

The Court also held that the plaintiffs had made a requisite showing that they would suffer irreparable harm without the injunctive relief sought, given plaintiffs’ “nonrecoverable costs of complying with the Rule.” The Court further determined that the other factors required for an order seeking injunctive relief, including balancing equities and the public interest, had been met. That was because, the Court reasoned, if it permitted the Final Rule to proceed, the injury to the Ryan, LLC plaintiffs and the public interest “would be great,” while granting the preliminary injunction and enjoining the FTC from enforcing the Final Rule would serve the public interest, and preserve “long-standing contractual [non-compete] agreements that have been judicially recognized as lawful and beneficial to the public interest.”

The Court declined, however, to issue a nationwide injunction at this stage of the case, but limited its decision to the plaintiffs in the litigation until a final order on the merits could be reached in late summer. While it remains to be seen, the Court could issue a broad order then.

At least one other lawsuit challenging the FTC’s Final Rule remains pending. On April 25, 2024, ATS Tree Services, LLC brought suit against the FTC in the U.S. District Court for the Eastern District of Pennsylvania. A decision on plaintiff’s request for a preliminary injunction in that case is anticipated by July 23, 2024. Further legal challenges from others may follow – particularly in light of the Texas federal court’s reasoning in the Ryan, LLC case.

Due to the possibility of differing decisions from other courts, and the Ryan, LLC Court’s refusal to impose a nationwide injunction, employers should continue to monitor the legal landscape of the ban on non-competes, and prepare for its possible implementation in early September 2024. Hinckley Allen will continue to monitor the Rule and provide updates as they come.