This week, Judge Ada E. Brown of the U.S. District Court for the Northern District of Texas in Ryan v. The Federal Trade Commission upheld a challenge by business groups to the FTC’s non-compete ban. In addition to confirming her earlier ruling that the FTC non-compete ban was not a valid exercise of agency power, the judge also expanded the limited, temporary injunction entered on July 3, 2024 to hold unlawful and set aside the noncompete-ban in a ruling with a “nationwide effect” that is not limited to the parties in the lawsuit. In other words, the FTC’s non-compete ban will not take effect on September 4 for anyone.
The Court concluded that: (1) the FTC lacked statutory authority to promulgate substantive rules concerning unfair methods of competition, i.e. the non-compete ban; and (2) the non-compete ban is arbitrary and capricious because it is “unreasonably overbroad without a reasonable explanation.” As a result, the Court found the non-compete ban to be an unlawful agency action. In deciding the appropriate relief, the Court relied on recent precedent from the Fifth Circuit to conclude its ruling must have a “‘nationwide effect,’ is ‘not party-restricted,’ and ‘affects persons in all judicial districts equally.’” Thus, the Court’s ruling prevents (1) the FTC from taking any action to enforce the non-compete ban against anyone; and (2) the FTC non-compete ban from taking effect on September 4, 2024—effectively vacating it.
What happens next? In the wake of the ruling, the FTC’s spokesperson stated, “[The FTC is] seriously considering a potential appeal.” If the FTC decides to appeal, the decision would be reviewed by the U.S. Court of Appeals for the Fifth Circuit in New Orleans. Any decision rendered by the Fifth Circuit would likely be appealed to the U.S. Supreme Court—meaning the final fate of the FTC’s non-compete will be revisited and could change.
Importantly, even though the FTC non-compete ban will likely not go into effect in the immediate future, the FTC still has the power in the interim under Section 5 of the FTC Act to pursue enforcement actions on a case-by-case basis. In reacting to the ruling, an FTC spokesperson stated, “Today’s decision does not prevent the FTC from addressing noncompetes through case-by-case enforcement actions.” If the FTC is to be taken at its word, it appears ready to amplify such enforcement actions in the future. The FTC’s posture could change after the November election depending upon the policies of the next administration.
How should employers approach non-competes? Notwithstanding this week’s ruling, employers should still be mindful of the enforceability of their non-competes now and in the future. Several states have limited or outright banned the use of non-competes. The move by the FTC could spark additional state legislatures to revisit state-level restrictions as they return from recess and begin new legislative sessions this Fall. The U.S. Congress could also decide to enact legislation of its own; and, it’s conceivable that this week’s ruling will serve as a catalyst for Congress to revisit such legislation.
Polsinelli attorneys are continually monitoring the evolving landscape of restrictive covenant law.
