FTC's non-compete rule in limbo following Texas District Court’s preliminary injunction

On April 23, 2024, the FTC issued a final version of its Non-Compete Rule (please see our latest coverage linked here ^1,2, which would impose a nationwide ban on post-employment non-compete agreements (“non-competes”) with limited exceptions if it becomes effective. The Non-Compete Rule, set to take effect on September 4, 2024, faced immediate legal challenges, starting with Ryan filed in the Northern District of Texas on the same day as the FTC’s issuance of the Non-Compete Rule.³ The U.S. Chamber of Commerce filed a similar claim in the same court the next day,⁴ which was followed by another similar claim filed by ATS Tree Services, LLC in the Eastern District of Pennsylvania.⁵

In Ryan, the plaintiff asserted that the FTC lacked the authority to enforce the Non-Compete Rule and that the Non-Compete Rule was beyond the scope of the Federal Trade Commission Act of 1914 (the “FTC Act”). In granting the preliminary injunction, the Court concluded that the FTC lacked substantive rulemaking authority under the FTC Act with respect to unfair methods of competition and that the Non-Compete Rule was “arbitrary and capricious” under the Administrative Procedure Act of 1946. The Court also determined that the Non-Compete Rule was overbroad and did not consider less disruptive alternatives or the positive benefits of non-compete agreements. Finally, the Court held that the plaintiff and plaintiff-intervenors would likely suffer irreparable harm without the injunction, as the Non-Compete Rule would invalidate existing non-compete agreements and prevent the creation of new ones, leading to potential loss of intellectual property and competitive advantages. 

Although the preliminary injunction in Ryan is a helpful barometer for employers as to how the Court will ultimately adjudicate the claims, the injunction itself is limited in a number of ways:

• The injunction is not a nationwide injunction and only applies to any acts the FTC takes against the plaintiff or the plaintiff-intervenors in Ryan;
• The injunction does not apply to the constituent members of the trade groups serving as plaintiff-intervenors in Ryan; and
• The Court intends to finally adjudicate the merits by August 30, 2024, which precedes the intended effective date of the Non-Compete Rule.

Ryan highlights the latest trend of challenges against the U.S. administrative agencies’ statutory authority. Although not cited in the opinion in Ryan, the Court may ultimately bolster its conclusions by citing to the U.S. Supreme Court’s recent overturn of the forty-year-old Chevron doctrine,⁶ which had granted federal agencies deference to reasonably interpret statutes that they administer when there is ambiguity.

To date, many employers are waiting to see what, if any actions, to take with respect to existing and future non-competes, as litigation against the Non-Compete Rule was initiated within hours of its publication by the FTC. The Court appears to be signaling in its preliminary injunction that companies should continue to “stay the course.” Nevertheless, we recommend that employers review their non-compete agreements and revisit similar restrictive arrangements, given the breadth of the Non-Compete Rule, as well as ongoing changes to state non-compete laws. International employers should continue to monitor developments in the U.S. and seek counsel to assess the enforceability of their non-competes within and outside of the U.S.

We are continuing to monitor the progress of these legal developments and invite our clients to reach out to the contacts on this article to discuss any questions about the Non-Compete Rule and related considerations.

Further Developments

In the meantime, there have been further developments. The plaintiffs’ request for the Court to expand the scope of the preliminary injunction to cover all businesses affected by the Non-Compete Rule, and not just the plaintiffs in the Ryan case, has been denied. The plaintiffs are now seeking summary judgment against the Non-Compete Rule, asking the Court to set the Non-Compete Rule aside on a nationwide basis.

On the other hand, a second challenge to the Non-Compete Rule, ATS Tree Services has failed to persuade a Pennsylvania federal judge to grant a preliminary injunction. Judge Hodge found that ATS’s arguments were speculative, and that the FTC is empowered to impose the Non-Compete Rule.

Footnotes

1. U.S. Federal Trade Commission Issues Final Rule to Ban Worker Non-Competes and Faces Legal Challenges .
2. FTC Says (Almost) No More Employee Non-Competes.
3. Ryan LLC v. Federal Trade Commission, Docket No. 3:24-cv-00986 (N.D Tex. Apr 23, 2024). The “plaintiff-intervenors” are the U.S. Chamber of Commerce of the United States of America, Business Roundtable, Texas Association of Business, and Longview Chamber of Commerce. The U.S. Chamber of Commerce joined the Ryan matter by filing a motion to intervene as plaintiffs, which the Court granted, and the U.S. Chamber of Commerce subsequently filed a motion to stay enforcement of the FTC's rule and for a preliminary injunction.
4. Chamber of Commerce of the United States of America et al v. Federal Trade Commission et al (April 24, 2024).
5. ATS Tree Services, LLC v. Federal Trade Commission et al (April 25, 2024). Arguments as to whether a preliminary injunction should be issued in this case are scheduled for July 10, 2024, and a ruling is expected by July 23, 2024.
6. Loper Bright Enterprises v. Raimondo and Relentless, Inc. v. Department of Commerce (June 28, 2024).