The bulletin below was published on July 8, 2024. Click Here for Taft’s Latest Coverage of the FTC’s Ban on Noncompete Agreements

As discussed in a prior Taft law bulletin, the Federal Trade Commission (FTC) recently issued a new rule that — if implemented — would ban virtually all noncompete agreements covering workers in the United States beginning Sept. 4, 2024. Unsurprisingly, the rule was immediately challenged in multiple federal courts, and on July 3, 2024, a judge of the U.S. District Court for the Northern District of Texas held in Ryan LLC v. Federal Trade Commission, 3:24-cv-986, that the FTC likely exceeded its statutory authority in promulgating such a sweeping, national ban on noncompete agreements. The court’s decision does not apply beyond the plaintiffs to that lawsuit, but the decision does cast serious doubt about the FTC’s authority and its ability to enforce the rule.

Ryan LLC consolidates challenges to the FTC rule brought by a tax services firm and several business groups the court permitted to intervene after they filed a similar lawsuit in the Eastern District of Texas. Collectively, these plaintiffs argued that the FTC’s actions in issuing the rule were unlawful because (1) the FTC exceeded its statutory authority under the Federal Trade Commission Act (FTCA); (2) the FTC’s actions were arbitrary and capricious under the Administrative Procedures Act (APA); (3) the structure of the FTC is unconstitutional; and (4) the FTC’s interpretation of the FTCA, if accepted, would involve an unconstitutional delegation of legislative authority to the FTC. The plaintiffs requested preliminary and permanent injunctions to prevent the FTC from enforcing the rule.

In granting the plaintiffs’ request for a preliminary injunction prohibiting the FTC from enforcing the rule against the Ryan LLC plaintiffs, the court held that the plaintiffs had shown a likelihood of success on the merits with respect to their statutory arguments under the FTCA and the APA. With respect to the FTCA, the court held that the FTC likely lacks the authority to issue substantive rules — as opposed to interpretive or procedural rules. With respect to the APA, the court held that the FTC’s actions were likely arbitrary and capricious. Among other criticisms, the court faulted the FTC for failing to identify evidence that would support such a broad, categorical ban on noncompete agreements, failing to consider the positive benefits of noncompete agreements, and failing to adequately address less disruptive alternatives. The court declined to decide the plaintiffs’ constitutional arguments, explaining that it was unnecessary to do so given its finding that plaintiffs were likely to succeed on their statutory arguments. The court also indicated that it intended to issue a decision on the merits of the plaintiffs’ requests for a permanent injunction by the end of August 2024.

Notably, the court declined the plaintiffs’ request for a nationwide injunction precluding the FTC from enforcing the rule against employers who were not involved in the Ryan LLC lawsuit. The court also declined to extend its ruling to the members of the business groups that were allowed to intervene in the lawsuit. As such, most employers will need to comply with the FTC rule unless another federal court issues a broader injunction against its implementation. That said, Taft’s attorneys anticipate that the plaintiffs in Ryan LLC and similar lawsuits will continue to press for broader injunctions before the rule is scheduled to take effect on Sept. 4, 2024. In particular, a judge of the Eastern District of Pennsylvania is currently scheduled to hold a preliminary injunction hearing in a separate challenge to the rule on July 10, 2024. Taft’s attorneys will provide further updates regarding any successful challenges to the FTC’s rule as they occur.

Although the ultimate fate of the rule will not be known for several months, this preliminary injunction decision from the Northern District of Texas casts serious doubt on the FTC’s authority to enforce the rule. The decision also reinforces that the enforceability of noncompete agreements has historically required a holistic analysis that takes into account the state laws and business interests at issue, among other considerations. If you have questions about a noncompete agreement, contact your Taft attorney or any attorney on the Employment Law team.