Federal Court in Texas Issues Limited Preliminarily Injunction Stopping the FTC’s Non-Compete Rule

UPDATE: On August 20, 2024, the U.S. District Court for the Northern District of Texas set aside the FTC’s final non-compete rule and ordered that the rule shall not be enforced or otherwise take effect on September 4, 2024. Although appellate activity is expected, the decision (for now) means that the FTC is prohibited from enforcing its rule on a nationwide basis.  This also means that employers will not be required to void employees’ existing non-competes covered by the rule or send written notices to their workforce by September 4 regarding the status of their non-competes. 

On July 3, 2024, the Federal District Court in the Northern District of Texas in Ryan LLC v. Federal Trade Commission granted a preliminary injunction staying the effective date of the FTC’s non-compete rule and enjoining the FTC from enforcing it against the specific plaintiffs who challenged it (Ryan, LLC, the US Chamber of Commerce, and a few other business groups which were previously permitted to intervene in the lawsuit).  The Court declined to enter a nationwide injunction, and, absent additional legal developments or a voluntary nationwide stay by the FTC, the non-compete rule is still set to go into effect on September 4, 2024 for all other covered employers.  In its decision, the Court indicated that it intends to rule on the merits of the case by August 30, 2024, in advance of the rule’s September 4, 2024 effective date.  We previously covered the contours of the FTC rule here, and discussed the rule’s potential impact on corporate transactions here. 

In granting a preliminary injunction, the Court held that the plaintiffs are likely to succeed on the merits of their case, i.e., that the FTC lacks the statutory authority to promulgate the final rule, and that the rule is arbitrary and capricious.  It is possible that the Court could rule differently on the merits, including broadening the reach of the injunction.  Critically, the rule is still being challenged in other courts, and those courts could reach a different conclusion.  For example, a federal court in Pennsylvania intends to rule on a similar challenge in the next few weeks.  The Ryan LLC ruling (and other anticipated district court rulings on the FTC rule) come at a time when the U.S. Supreme Court has significantly narrowed the rulemaking and enforcement authority of federal agencies and signaled that it will continue to restrain overbroad federal agency actions. 

However, even if the rule fails, non-competes remain under attack from various quarters, including from other state and local legislatures (some of which have already banned them, while others have introduced new legislation to limit or prohibit them) and by other federal agencies (like the National Labor Relations Board).  Employers are thus well-advised to continue to seek counsel before crafting and deploying non-compete covenants (or in continuing to do the same).

Mintz’s Employment and Antitrust Practices are carefully monitoring legal developments and stand ready to assist with the shifting non-compete landscape.

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