On July 3, 2024, the District Court for the Northern District of Texas stayed enforcement of the Federal Trade Commission’s (FTC) impending ban on non-compete agreements between employers and employees (the Rule) pending the outcome of ongoing litigation.1 While the injunction currently only applies to the parties in the case, the court has committed to publishing its final ruling on or before August 30, 2024, in advance of the Rule’s implementation date. The decision is a window into how the court is likely to rule on the merits of the case, which would impact all employers and employees subject to non-compete agreements.
By way of background, the FTC published the final Rule banning employers from enforcing non-compete agreements against their employees on April 23, 2024. Please see PilieroMazza’s blog summarizing the requirements of the Rule here. The Rule’s effective date is scheduled to be September 4, 2024. Several business groups filed suit to prevent the FTC from enforcing the Rule, arguing that the FTC does not have the rulemaking authority to declare non-compete agreements to be an unfair method of competition. They also asked the court to issue an injunction, stopping the Rule from becoming effective while the litigation is pending.
For a court to grant a preliminary injunction, the requesting party must provide evidence it is likely to succeed in the case and that failing to grant the injunction would cause it irreparable harm. Here, the court found Congress did not grant the FTC the authority to promulgate substantive rules like the non-compete ban but rather that the authority is limited to procedural and process-based rules. An agency is not permitted to exceed the authority granted to it by Congress. Additionally, the court found the FTC published the rule arbitrarily and capriciously in violation of the Administrative Procedure Act.
While this order strongly suggests the Rule will not survive this court’s substantive review later this summer, it is likely even if the court strikes down the Rule, and the FTC will appeal the decision to the Fifth Circuit Court of Appeals. Recent cases at the appellate level have not been friendly to expanding executive or agency authority. While the litigation is pending, employers are advised to be mindful of developments in this case in the event that the rule is somehow implemented. Regardless of the outcome of this case, many states restrict how non-compete agreements may be used, and employers are urged to review their non-compete and non-solicitation agreements for state law enforceability in the state where the employee works.
PilieroMazza’s Labor & Employment is monitoring the situation and is available to help companies navigate compliance and related pitfalls. If you need assistance reviewing your restrictive covenant agreements, please contact Nichole Atallah, Sarah Nash, Kirby Rousseau, or another member of the Group.
1Ryan, LLC v. FTC, Case No. 3:24-CV—00986, Slip Op. at 19, 23 (N.D. Tex., July 3, 2024).
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