Texas Federal Court ‘Sets Aside’ FTC’s Noncompete Clause Rule

Judge Ada Brown of the US District Court for the Northern District of Texas entered a final judgment in Ryan LLC v. Federal Trade Commission (FTC) on August 20, 2024, holding unlawful and setting aside the FTC Noncompete Clause Rule just weeks before it was set to take effect on September 4, 2024.

Unlike the preliminary injunctive relief that Judge Brown entered in July 2024, which applied only to the parties and intervenors in the litigation, the court’s final judgment has a “nationwide effect,” halting the ban universally, including to those not involved in the lawsuit.

The Ryan Court’s Preliminary Injunction

In the first major order concerning the ban, as detailed in our prior LawFlash, the Ryan court issued an injunction preliminarily enjoining the FTC Noncompete Clause Rule (the Rule) on July 3, 2024, staying the effective date of the FTC’s noncompete ban. Critically, however, the Ryan court limited the scope of its preliminary injunction to the parties and plaintiff-intervenors to the lawsuit, expressly declining to issue nationwide injunctive relief staying the injunction for other employers at that “preliminary stage.”

The Ryan Court’s Final Judgment

On August 20, the Ryan court entered a final judgment granting the plaintiffs and plaintiff-intervenors’ motions for summary judgment, asking the court to set aside the Rule. The Ryan court made clear at numerous points in its order that “the question to be answered is not what the Commission thinks it should do but what Congress has said it can do.” Against that backdrop, the court found the Rule unlawful and held that (1) the FTC lacked the substantive rulemaking authority to promulgate the ban, and (2) the ban was arbitrary and capricious because it was unreasonably overbroad and without explanation.

In rejecting the FTC’s argument that any relief should be limited to the named plaintiffs, the Ryan court stated that it “must hold unlawful and set aside the FTC’s Rule as required under the [Administrative Procedures Act].” To this end, the court’s relief is not “party-restricted” and instead has a “nationwide effect.” The court thus held “unlawful and set[] aside the Rule,” ordering that “the Rule shall not be enforced or otherwise take effect on its effective date of September 4 or thereafter.”

The Possibility of Appeal and Other Legal Challenges

It is unclear whether the FTC will appeal the Ryan court’s final judgment. Any appeal would be to the US Court of Appeals for the Fifth Circuit. Absent a showing of an emergency and the Fifth Circuit entering an emergency stay, it is unlikely that the Fifth Circuit will issue any order in advance of the previously scheduled September 4 effective date.

Two other courts have also issued inconsistent preliminarily ruling on the noncompete ban. In contrast to the Ryan court, the court in ATS Tree Services LLC v. FTC held that the FTC acted within its authority under the FTC Act to promulgate substantive unfair methods of competition rules, and therefore the FTC has the authority to enforce the noncompete ban. Similar to the Ryan court, the court in Properties of the Villages Inc. v. FTC preliminarily enjoined the ban with respect to the plaintiff in the lawsuit. But unlike the Ryan court, the judge in Properties of the Villages Inc. held that the FTC likely did have substantive rulemaking authority, instead enjoining the ban based on the “major questions doctrine.” As a result, if the judges in ATS Tree Services and Properties of the Villages Inc. follow the decisions from their preliminary rulings, three federal district courts will be split on the issue, likely setting up challenges to proceed to the appellate courts and ultimately to the US Supreme Court.

Employer Considerations

For now, employers can continue to enforce and enter into noncompetes subject to applicable state law. Given the months of uncertainty as to the validity of the FTC noncompete ban, employers should consider communications to employees who may be confused about the status, including preparing HR teams with clear talking points to respond to employee inquiries about their noncompetes. In addition, employers should continue to focus on improving their protections for confidential, proprietary, and trade secret information and monitor state legislation concerning and court opinions challenging the overbreadth of confidentiality clauses and restrictive covenants.