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.
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.
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.
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.
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:
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.”
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.
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.
If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following: