Texas Court Decision Limits FTC's Non-Compete Ban, Casting Doubt on Future Enforcement

As previously reported, on April 24, the Federal Trade Commission passed a Final Rule that would render almost all non-compete agreements with workers unlawful, effective September 4, 2024. However, a recent decision from the Northern District of Texas blocked enforcement of that Rule for a short list of litigants and casts doubt on the Rule’s enforcement in the future.

On July 3, 2024, a Federal Court in the Northern District of Texas issued an Order granting a Preliminary Injunction that partially blocks enforcement of the FTC’s Rule and signals that a complete injunction preventing the Rule from taking effect may be coming. The District Court’s ruling resulted from a lawsuit filed by tax firm Ryan LLC, alleging that the FTC lacks the legal authority to create and enforce its ban on non-competes. The Court agreed, holding that Ryan LLC was substantially likely to prevail on its claims as “the text, structure, and history of the FTC Act reveal that the FTC lacks substantive rulemaking authority with respect to unfair methods of competition,” which was the FTC’s legal justification for imposing the Rule. The Court also found that the FTC acted in an “arbitrary and capricious” manner in passing the Rule because it had relied upon inadequate evidence when evaluating the economic effects of the Rule and had failed to sufficiently consider alternatives to a broad ban on non-competes.

The Preliminary Injunction entered by the Northern District of Texas only prohibits enforcement of the FTC’s Rule to Ryan LLC and a short list of specific entities that moved to intervene in the lawsuit. The Court specifically declined to enter a nationwide injunction, finding that the moving parties had not provided sufficient justification for such a sweeping order. However, the Court has indicated that it will issue a final opinion on the merits of the case by August 30, 2024.

At this time, there is no legal barrier to the FTC’s ban on non-competes being enforced against the vast majority of employers in the United States as of September 4, 2024.  However, the Court’s opinion granting Ryan LLC’s request for a preliminary injunction strongly suggests that it will enter an Order on or before August 30 finding as a matter of law that the FTC lacks the authority to enforce its Rule. This Order would likely have a wider effect, and the Court’s final ruling on the merits of the case is certain to be appealed regardless of the outcome. 

Employers should continue to closely monitor the situation as litigation over the FTC’s Rule progresses. There are multiple other active lawsuits challenging the FTC’s authority, and decisions in those cases in the next several months could further impact the implementation of the Rule. In the interim, if you have any questions about how to proceed in the current regulatory landscape, contact your Dinsmore attorney.