Federal Court Enters Preliminary Injunction Enjoining Enforcement of the FTC Ban on NonCompete Clauses

In July 2024, a U.S. District Court for the Northern District of Texas entered a preliminary injunction enjoining the enforcement of the Federal Trade Commission’s recently announced ban on noncompete clauses.  Importantly, the injunction is limited to the plaintiff and intervenors in the lawsuit, including, but not limited to, the U.S. Chamber of Commerce.

What is the FTC NonCompete Ban?

In January 2023, the FTC announced a notice of proposed rulemaking pertaining to a ban on employers entering into and utilizing noncompete clauses.  In April 2024, FTC commissioners voted on the final rule, including a limited exception for “senior executives.”  The effective date for the new rule was anticipated to by September 2024.

FTC policy supporting the ban includes, without limitation, purported economic benefits that would result from banning noncompetes.  A number of dissenting statements by Commissioners resulted in various challenges to the rule, and perhaps the federal court order referenced herein.

How has the FTC NonCompete Ban Rule Been Challenged?

Following the FTC adoption of the final rule, a Texas-based tax firm Ryan LLC filed various legal challenges in the US District Court for the Northern District of Texas.  In doing so, the plaintiff sought a stay of the effective date and to preliminarily enjoin enforcement of the rule.  Subsequently, the U.S. Chamber of Commerce sought almost identical relief in the Eastern District of Texas on behalf of itself and other business associations, ultimately intervening in the Ryan matter.

What Does the Ryan Court Order Enjoining Enforcement of the FTC Ban on NonCompetes State?

On July 3, 2024, the Northern District of Texas entered a limited order that effectively stayed the effective date of the FTC rule, preliminarily enjoining its enforcement with respect to the plaintiffs named in that specific matter.  Importantly, the court agreed with a number of Ryan’s arguments, as well as the dissenting arguments set forth by Commissioners at the April 2024 vote.

Specifically, the court found:

• The text, structure, and history of the FTC Act reveal that the FTC lacks substantive rulemaking authority with respect to unfair methods of competition under Section 6(g)
• The FTC exceeded its statutory authority in promulgating the noncompete ban
• The noncompete ban is arbitrary and capricious because it is unreasonably overbroad without a reasonable explanation
• The noncompete ban imposes a one-size-fits-all approach with no end date, which fails to establish a rational connection between the facts found and the choice made
• The FTC’s reasoning for the rule is inconsistent and flawed empirical evidence that fails to consider the positive benefits of non-compete agreements, and disregards the substantial body of evidence supporting noncompete] agreements
• Compliance with the noncompete rule, including required notice obligations, would result in financial injury to the plaintiffs
• It is evident that if the requested injunctive relief is not granted, the injury to plaintiffs and the public interest would be great
• The noncompete rule makes unenforceable long-standing contractual agreements that have been judicially recognized as lawful and beneficial to the public interest

The court declined to extent the injunctive relief to members of the U.S. Chamber of Commerce and other intervenors.  Notably, the court also refused to extend the rule nationwide.  However, a final decision has not yet been issued and the scope of the ruling could potentially expand.  The FTC could potentially appeal the court’s decision.  Consult with an experienced ecommerce attorney to discuss the impact of this decision and how to prepare for the noncompete rule ahead of its September 2024 effective date.

Richard B. Newman is an FTC compliance attorney at Hinch Newman LLP. 

Informational purposes only. Not legal advice. This article is not intended to and should be construed as a complete summary or discussion of the Rule and all of its obligations and restrictions. May be considered attorney advertising.