Texas Two-Step: Court Makes First Move Toward Blocking FTC Non-Compete Ban

On July 3, 2024, in Ryan LLC et al. v. Federal Trade Commission, the United States District Court for the Northern District of Texas issued a much-anticipated ruling on the final Noncompete Rule (the “Final Rule”) announced by the U.S. Federal Trade Commission (“FTC”) in April 2024. As employers are aware, the Final Rule would, with limited exceptions, prohibit employers from entering into post-employment non-competition agreements with workers, and would also invalidate previously executed non-competition agreements (see our previous alert here.)

With its order in Ryan, the court granted the named plaintiffs’ motion for a preliminary injunction, prohibiting the FTC from implementing or enforcing the Final Rule, but only against the named plaintiffs. Although the court declined to grant nationwide relief, it indicated that it would issue a ruling on the merits by August 30, 2024, just five days before the Final Rule’s current effective date of September 4, 2024. Importantly, the court signaled that the Final Rule is unlikely to survive judicial scrutiny on the merits for a number of reasons.

Primarily, the court found unconvincing the FTC’s argument that it was authorized to publish the Final Rule under its broad powers to prevent unfair methods of competition. Although the court acknowledged that the FTC has the authority to make certain “housekeeping” rules dealing with unfair or deceptive practices, it found that the FTC Act does not “expressly grant the [FTC] authority to promulgate substantive rules regarding unfair methods of competition.” Because agencies only have “the powers that Congress grants through a textual commitment of authority” and Congress has not expressly delegated substantive rulemaking to the FTC to regulate unfair competition, the court found that the FTC exceeded its authority in enacting the Final Rule.

The court also criticized the breadth of the Final Rule: “The [FTC’s] lack of evidence as to why they chose to impose such a sweeping prohibition—that prohibits entering or enforcing virtually all non-competes—instead of targeting specific, harmful non-competes, renders the Rule arbitrary and capricious.” According to the court, the Final Rule “imposes a one-size-fits-all approach with no end date,” and thus lacks a rational connection between the agency’s goal of preventing unfair competition and the “categorical ban” it adopted without “targeting specific, harmful non-competes.”

Finally, the court recognized that the plaintiffs (like other employers nationwide) would suffer irreparable harm if forced to comply with the Final Rule, agreeing that its implementation would “announce open season” for poaching workers and increase the risk that departing workers would take valuable intellectual property and proprietary information to competitors. Relying on existing case law, the court recognized that “complying with a regulation later held invalid almost always produces the irreparable harm of nonrecoverable compliance costs.”

The court’s ruling in Ryan follows and cites to the Supreme Court of the United States’ very recent decision in Loper Bright Enterprises, Inc. v. Raimondo. As AGG covered here, Loper overturned the Chevron doctrine of deference to administrative interpretations. Like other court rulings immediately following Loper, the Ryan ruling takes a narrow view of the reach of permissible agency authority, especially where agency authority does not derive from statutory language.

Between this initial blow to the Final Rule and the pendency of other lawsuits in Texas and Pennsylvania attacking the Final Rule, the chances of the FTC’s non-competition ban going into effect are in serious jeopardy. However, because the Ryan court decided not to issue a nationwide injunction, other employers who are not a party to Ryan still need to consider the notice obligations that will otherwise go into effect if no court permanently enjoins the Final Rule. In a perfect world, the FTC would withdraw the Final Rule before September 4, 2024, either now in response to Ryan or after a final order is issued. We think that this path is unlikely given the political dynamics of this issue in an election cycle, but we will continue to monitor the FTC’s actions, if any, in response to this decision, and whether any court goes further than Ryan and issues a nationwide injunction.

In the meantime, employers are faced with an immediate choice of whether to give the notices required by the Final Rule by September 4, 2024, which certain current and former employees may insist on receiving and/or then contend have not been timely provided to them. If employers elect not to provide these notices or otherwise ignore the mandates of the Final Rule, the FTC could still then try to enforce the Final Rule, and employers will be forced to defend their interests via litigation relying on the same arguments made in Ryan before another district court.

We can also expect that employees seeking to migrate in violation of existing agreements, and/or businesses that are seeking to migrate employees from a competitor, will bring declaratory judgment actions seeking to void covenants based on the Final Rule. Employers seeking to protect their covenants may then have to litigate the application of the Final Rule in their particular jurisdiction(s), relying on the same arguments made in Ryan, but with the understanding that courts in other jurisdictions may not be as favorable as the Northern District of Texas.

We’ll continue to monitor and update with further developments. If you have any questions about the Final Rule or legal challenges to the Final Rule, please contact a member of AGG’s Employment team.