Federal Court stops FTC’s ban on Non-Competes

Federal Court stops FTC’s ban on Non-Competes

On September 4th, 2024, a Federal Trade Commission (FTC) rule goes into effect, banning non-compete clauses in all employment agreements, nationwide (Non-Compete Rule) 16 CFR 910. If the Non-Compete Rule goes into effect, arguably only existing agreements with executives and some future agreements involving the sale of a business will be enforceable. As written, the Non-Compete Rule could release over 30 million employees — one-fifth of the US  workforce — from existing non-compete obligations in private contracts. Unchecked, the federal Non-Compete Rule will diminish the goodwill business owners have developed over the years and could otherwise open employers up to new challenges in protecting proprietary information.

Ryan, LLC v. FTC

As noted in the recent preliminary ruling in Ryan, LLC. v. FTC, (USDC, N. Tx., 3:24-cv-986-E), while non-disclosure agreements may be a first step in protecting proprietary information, they are costly and difficult to enforce and lack the same protection to the goodwill of a business as a non-compete. The Ryan case is one of at least three lawsuits initiated by employers to stop the FTC’s enforcement of the Non-Compete Ban. In Ryan, the plaintiffs claim that non-compete agreements are essential to their business’s tax service and consulting facets and that banning them would cause irreparable harm. The complaint challenges the FTC’s Non-Compete Rule by questioning the method by which the FTC issued the Rule to challenging the constitutionality of the FTC’s structure. The Ryan plaintiffs rely on statutory interpretation, plain meaning, and the application of earlier case-law concerning the scope of agency authority granted by Congress.

The challenges raised in Ryan empowered the federal district court in Dallas, Texas (in the U.S. 5th Circuit), to stop the FTC for now. Until early July 2024, the parties in the Ryan case had been awaiting the Court’s decision on whether to grant preliminary relief including a stay of the effective date of the rule and an injunction against any FTC enforcement action. On July 3rd, the Texas federal Court stopped the FTC ban on non-competes, adopting plaintiffs’ arguments.  The Court granted the requested preliminary injunctive relief pending a final ruling on the merits, temporarily staying the September 4, 2024 effective date of the Non-Compete Ban and prohibiting the FTC from enforcing the Non-Compete Ban against the plaintiffs.

Court’s Reasoning

In issuing her order, U.S. District Judge Ada Brown of the Northern District of Texas cited the Ryan plaintiffs’ likelihood of succeeding on the merits of their case, irreparable harm that would result to employers without injunctive relief, and the balance of harms and public interest weighing in favor of the plaintiff-employer. The Court quoted an earlier Fifth Circuit decision in Central Forwarding, Inc. v. ICC, 698 F.2d 1266, 1272 (5th Cir. 1983), pointing to what the Court believes is an overreach by the FTC, stating “[a]gencies do not have unlimited power to accomplish their policy preferences until Congress stops them; they have only the powers that Congress grants through a textual commitment of authority.”

Judge Brown concluded that the FTC exceeded its authority under the plain meaning of 15 U.S.C. §57a(b) because Congress granted only limited authority to the FTC to promulgate interpretive rules with respect to unfair or deceptive acts or practices and not substantive rules for unfair methods of competition that would permit the FTC to ban contracts entered into by private parties that include non-compete obligations. Judge Brown also held that since the FTC is constrained by the Administrative Procedures Act’s arbitrary and capricious standard, there is a substantial likelihood the Non-Compete Rule is “overbroad without any reasonable explanation,” by implementing a “categorical ban” on non-competes…instead of targeting specific, harmful non-competes.” The ruling also held the FTC failed to sufficiently address less disruptive alternatives to the Non-Compete Ban during the rule-making process.

Ryan impact on employer-employee relations

Provided the Ryan court’s final ruling does not drastically deviate from the preliminary ruling and otherwise withstands appellate scrutiny, the decision could be a serious setback to the expansion of federal agency power. Beyond the clear implications a court’s decision will have on economic and fiscal policy and relationships between employers and employees, a final opinion in the Ryan case could also solidify recent Supreme Court decisions trimming back the powers of federal agencies. The significance of this decision is difficult to exaggerate. While the final outcome is still uncertain, some would say this week’s order was a crucial victory for Ryan, employers, and the rule of law.

For now, employers may have little choice but to explore other options for retaining employees and for protecting proprietary information and the value of goodwill in their businesses. Non-disclosure agreements are a good place to start but unlikely a satisfactory solution for business owners who have taken the risk of entrepreneurial enterprise and ownership.  If the FTC’s new Non-Compete Ban takes effect, it will force businesses to change longstanding policy and practice previously dictated by state law to accommodate an expanding exercise of power by federal agencies without regard to potential implications on an otherwise free market system of commerce and arm’s length transactions between parties.

Ruling on the Merits by August 30, 2024

The next date to watch is August 30, the Ryan Court’s self-imposed deadline for ruling on the merits after the parties are given an opportunity to present additional evidence and provide a complete record to the Court. Despite the encouraging news for employers and though the Court may have the authority to grant a nationwide injunction, Judge Brown exercised judicial constraint by limiting the scope of the preliminary injunctive relief to only the parties in the case.  So, for the rest of the country, the Non-Compete Rule still goes into effect on September 4, 2024, unless the Court in Ryan or in one of the other federal courts considering the Non-Compete Rule imposes a nationwide stay on the new rule.


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