Texas Federal Court Enters Limited Preliminary Injunction Staying FTC’s Noncompete Clause Ban

Judge Ada Brown of the US District Court for the Northern District of Texas entered a preliminary injunction on July 3, 2024 staying the effective date and enjoining the enforcement of the Federal Trade Commission’s (FTC’s) comprehensive ban on noncompete clauses (Noncompete Ban). The preliminary injunction, however, is limited to the plaintiff and plaintiff-intervenors in the lawsuit, including Plaintiff Ryan LLC and Plaintiff-Intervenors the US Chamber of Commerce, Business Roundtable, Texas Association of Business, and Longview Chamber of Commerce.

The preliminary injunction does not extend to those not party to the lawsuit, to the individual members of the business associations that intervened in the lawsuit, or to employers nationwide.

KEY TAKEAWAYS

• FTC Overreach: The court found that the FTC lacks substantive rulemaking authority for unfair methods of competition and that the Noncompete Ban was arbitrary and capricious.
• Injunction Limited to the Parties: The court issued a preliminary injunction, temporarily blocking the Noncompete Ban for the specific parties involved in the case.
• No Nationwide Injunction: The ruling applies only to the parties in the case and is not a nationwide injunction of the rule, meaning that the Noncompete Ban is technically still alive for those not party to the lawsuit, for the members (including small businesses and chambers of commerce across the country) of the business associations that intervened in the lawsuit, and for employers nationwide.
• Final Ruling Coming: The court will issue a final decision by August 30, 2024, which may or may not block the Noncompete Ban completely.

THE FTC NONCOMPETE BAN

In January 2023, the FTC announced a notice of proposed rulemaking regarding a comprehensive ban on employers entering into and maintaining noncompete clauses with their workers. After receiving and weighing over 26,000 public comments, the FTC conducted an open commission meeting in April 2024, during which the five FTC commissioners voted on a final rule for the Noncompete Ban. The commissioners voted along party lines, with three of five votes in favor of issuing the Noncompete Ban, with a limited exception for “senior executives.”

Following the vote, the Noncompete Ban was to take effect September 4, 2024, 120 days from the Noncompete Ban’s publication in the Federal Register. Our prior LawFlash addresses the FTC’s open commission meeting and the final rule on the Noncompete Ban.

THE COMMISSIONERS’ ARGUMENTS FOR AND AGAINST THE NONCOMPETE BAN

During the open commission meeting, the three commissioners who voted in favor of the Noncompete Ban cited potential economic benefits that would result from banning noncompetes. In opposition, Commissioners Melissa Holyoak and Andrew Ferguson each authored dissenting statements challenging the FTC’s authority to promulgate the Noncompete Ban, with Commissioner Holyoak concluding that “the FTC Act’s text and structure do not support competition rulemaking authority” and Commissioner Ferguson concluding that the FTC fell “woefully short of satisfying [its] requirement” under an arbitrary and capricious standard.

Commissioners Holyoak’s and Ferguson’s dissenting statements laid the foundation for numerous challenges to the Noncompete Ban—and now at least one order enjoining the rule.

CHALLENGES TO THE NONCOMPETE BAN

Within hours of the FTC’s vote to adopt the final rule, Texas-based tax firm Ryan LLC filed in the US District Court for the Northern District of Texas the first of three legal challenges to the FTC’s Noncompete Ban (the “Ryan case”), seeking a stay of the effective date and to preliminarily enjoin the Noncompete Ban.

Days later, the US Chamber of Commerce filed a similar challenge seeking identical relief in the US District Court for the Eastern District of Texas on behalf of itself and other business associations (the “Chamber case”), but that case was stayed in light of the first-filed Ryan case.

ATS Tree Services then filed a similar challenge seeking identical relief in the US District Court for the Eastern District of Pennsylvania (the “ATS case”). After the Chamber case was stayed, the US Chamber of Commerce and associated plaintiffs intervened in the Ryan case. 

THE RYAN COURT ORDER

On July 3, 2024, the Ryan court entered a limited order staying the effective date and preliminarily enjoining the enforcement of the Noncompete Ban as applied to the named plaintiffs. Notably, as addressed below, the Ryan court did not stay the effective date or enjoin the enforcement of the Noncompete Ban for employers who are not party to the Ryan case.

In enjoining the Noncompete Ban, the Ryan court adopted several arguments advanced by Commissioners Holyoak and Ferguson in their dissenting statements and by Ryan in its briefing requesting the stay and preliminary injunction:

• In finding that the plaintiffs demonstrated a likelihood of success on the merits of their challenge, the Ryan court concluded that “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)” and the FTC therefore “exceeded its statutory authority in promulgating the Non-Compete [Ban].”
• In finding that plaintiffs demonstrated a likelihood of success on the merits of their claims, the Ryan court next concluded that the Noncompete Ban “is arbitrary and capricious because it is unreasonably overbroad without a reasonable explanation. It 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 court further criticized the FTC’s rationale for the Noncompete Ban as using “inconsistent and flawed empirical evidence,” failing to “consider the positive benefits of non-compete agreements,” and disregarding the “substantial body of evidence supporting [non-compete] agreements.”
• In finding that the plaintiffs demonstrated that they would experience irreparable harm if the Noncompete Ban were not enjoined, the Ryan court concluded that “compliance with the Rule”—namely, compliance with the notice obligations required by the Rule—“would result in financial injury” to the plaintiffs for which there is no avenue of recovery.
• In finding that the plaintiffs demonstrated that the balance of harm weighed in favor of an injunction, the Ryan court found it “evident that if the requested injunctive relief is not granted, the injury to both Plaintiffs and the public interest would be great” as the Noncompete Ban “makes unenforceable long-standing contractual agreements that have been judicially recognized as lawful and beneficial to the public interest.”

The Ryan court limited the scope of its stay and injunction of the Noncompete Ban to the plaintiffs and plaintiff-intervenors. The court declined to extend injunctive relief to members of the Chamber of Commerce and other business associations who intervened in the lawsuit. Citing concerns about standing and redressability, and a lack of briefing on these issues, the Ryan court also declined to issue nationwide injunctive relief “at this preliminary stage.”

POSSIBILITY OF APPEAL

The Ryan court intends to enter a merits disposition of the lawsuit on or before August 30, 2024. Given the expedited timeline of the merits disposition and the September 4, 2024 effective date that follows shortly thereafter, it is unclear at this time whether the FTC will appeal the court’s grant of the preliminary injunction or whether the plaintiffs will appeal the narrow scope of the injunction.

NEXT STEPS

Morgan Lewis is closely monitoring developments in the Ryan case and the ATS case, the latter of which has set oral argument on the plaintiffs’ preliminary injunction motion for July 10, 2024. For now, employers should continue preparing for the Noncompete Ban to go into effect on September 4, 2024 by analyzing the breadth of their confidentiality clauses, nondisclosure covenants, forfeiture clauses, and employee and customer nonsolicitation covenants to determine whether changes will need to be made to ensure that such covenants comply with the Noncompete Ban.