Texas Federal Court Enjoins Enforcement of FTC Non-Compete Ban But Declines to Impose Nationwide Injunctive Relief

On July 3, 2024, Judge Ada Brown of the U.S. District Court for the Northern District of Texas temporarily blocked the Federal Trade Commission (FTC) from enforcing its recent rule banning virtually all employee non-compete agreements in the United States. In its 33-page opinion, the court ruled that the plaintiffs are likely to succeed on the merits of their claims that the FTC lacks statutory authority to issue its non-compete ban via rulemaking and that the FTC’s decision was arbitrary and capricious.

However, in an unfortunate twist for employers across the country, the court declined to grant nationwide preliminary injunctive relief, opting instead to limit its injunction to the specific plaintiffs in the lawsuit. The court indicated that it intends to issue a final ruling by August 30, 2024—days before the non-compete ban is scheduled to take effect on September 4.

What Issues Did the Court Consider and How Did It Rule?

As we have previously reported, the FTC’s final rule bans nearly all employee non-competes, including existing ones, and requires employers to notify all affected employees that their existing non-competes are no longer enforceable. The Texas federal court in Ryan LLC v. Federal Trade Commission considered the first legal challenge filed against the ban and was tasked with deciding whether to enjoin (pause enforcement of) the ban on a preliminary basis. In Ryan, the court held that the plaintiffs satisfied all three requirements for a preliminary injunction:

1. Likelihood of Success on the Merits: The court found that the plaintiffs established a likelihood of success in their key arguments:
   • The FTC lacks the statutory authority to issue substantive rules defining unfair methods of competition, including the ban on non-competes.
   • The FTC’s action was arbitrary and capricious under the Administrative Procedure Act (APA), 5 U.S.C. §§ 551–559.
2. Irreparable Harm: The court found that the plaintiffs would suffer immediate financial injury and nonrecoverable costs if the ban was to take effect, including invalidating current non-competes, increased risk of departing workers taking intellectual property, and signaling to competitors that poaching is permissible.
3. Balance of Equities and Public Interest: The court balanced the equities in favor of the plaintiffs, holding that an injunction would maintain the status quo and prevent substantial adverse economic impact without harming the FTC.

Limited Scope of the Injunction

Despite the ruling, the court declined to grant a nationwide injunction, limiting the relief to the specific plaintiffs in Texas. Therefore, employers still need to evaluate their risk tolerance and compliance strategies as the September 4 effective date approaches. The court indicated that nationwide relief was not necessary for the plaintiffs to receive complete relief at this preliminary stage and based on the judges reasoning, nationwide relief does not seem likely in August by the Texas court.

What Comes Next?

The Texas court’s ruling casts serious doubt on the enforceability of the FTC’s Non-Compete Rule, but with the scope of the injunction limited to only the plaintiffs, the battle is far from over. All eyes are now on a separate challenge pending in the Eastern District of Pennsylvania (ATS Tree Services, LLC v. The Federal Trade Commission), where the court has indicated it will issue its decision by July 23. Even if the decision in ATS Tree Services does not lead to a broader injunction against the FTC’s rule (which seems likely due to the plaintiff-specific relief sought in that case), a second decision holding that the FTC’s Non-Compete Rule is likely unenforceable will further undermine the Non-Compete Rule and will hopefully result in others (including the FTC) to act to delay the effective date of the Rule.

Additionally, as the final decision in Ryan and the Pennsylvania court’s decision will be issued just a few months before the 2024 presidential election, the election could significantly influence the direction of the FTC with respect to non-compete agreements and the Non-Compete Rule if there is an administration change even though the FTC’s current stance signals continued scrutiny and potential action against such agreements.

How Should Employers React?

The proposed FTC regulations are not the most recent or significant development regarding the legality of non-compete agreements. For example, last year Minnesota banned employers from entering into new non-compete agreements. The National Labor Relations Board has also taken steps to use its authority to limit the enforceability of non-competes.

As of now, only the employers in Texas who received injunctive relief are protected against the FTC’s non-compete ban taking effect on September 4. Accordingly, all other employers should:

• Evaluate Risk Tolerance: Consider the possibility of needing to comply with the ban and develop a structured compliance strategy.
• Consider Legal Challenges: Filing their own legal challenges may be prudent.
• Strategize Compliance: Different strategies may be needed for the ban on new non-competes versus the notification requirement for existing agreements. It may be wise to wait before notifying employees until there is more legal clarity.
• Seek Legal Counsel: The future of this FTC Non-Compete Rule is uncertain and confusing, to say the least. Businesses should contact their legal counsel at Felhaber to determine how they should proceed.