Texas District Court Prohibits the FTC from Enforcing Its Non-Compete Ban Nationwide

Texas District Court Prohibits the FTC from Enforcing Its Non-Compete Ban Nationwide

August 22, 2024, Covington Alert

Nationwide Injunction

On August 20, 2024, Judge Ada Brown of the United States District Court for the Northern District of Texas granted summary judgment for the plaintiffs in Ryan LLC v. FTC, preventing the FTC from enforcing its proposed rule banning almost all non-compete clauses in employer agreements. (Click here for the opinion.) The rationale for Judge Brown’s decision was consistent with her prior ruling on plaintiffs’ motion for a preliminary injunction (described here): the FTC does not have substantive competition-related rulemaking authority and the proposed non-compete rule was arbitrary and capricious. However, unlike Judge Brown’s preliminary injunction order, which was limited to the named plaintiffs, her summary judgment order states that the proposed rule “shall not be enforced or otherwise take effect on September 4, 2024, or thereafter.” Applying the plain text of § 706(2) of the APA, Judge Brown held that the proper remedy after concluding that the non-compete rule was in excess of the FTC’s statutory authority and arbitrary and capricious was to “set aside” the rule. According to the opinion, “setting aside agency action under § 706 has ‘nationwide effect,’ is ‘not party-restricted,’ and ‘affects persons in all judicial districts equally.” As a result, the order prohibits the FTC from enforcing the proposed non-compete rule on a nationwide basis.

Other Challenges to the Proposed Rule

Two other federal district courts have also opined on the FTC’s authority to issue its proposed non-compete ban. Both cases were decided on preliminary injunction motions. 

First, Judge Kelley B. Hodge in the Eastern District of Pennsylvania held in late July that the plaintiff in ATS Tree Services v. FTC had failed to show irreparable harm and therefore denied its motion for a preliminary injunction. (Click here for the opinion.) But the court did not stop there. Judge Hodge went on to say that the FTC has competition-related rulemaking authority under Sections 5 and 6(g) of the FTC Act and that the plaintiff had failed to show a likelihood of success on the merits.

Second, Judge Timothy J. Corrigan in the Middle District of Florida granted a preliminary injunction prohibiting the FTC from enforcing the non-compete rule against Properties of the Villages. Judge Corrigan issued his ruling from the bench after oral argument (click here for the full order), holding that the FTC exceeded its statutory authority in issuing the non-compete rule under the Major Questions Doctrine articulated by the Supreme Court in West Virginia v. EPA (and other cases). The court held that Properties of the Villages demonstrated both a likelihood of success on the merits as well as irreparable harm. That injunction applied only to the named plaintiff.

Up Next

• We expect the FTC to appeal Judge Brown’s decision to the Fifth Circuit. The FTC could seek an expedited appeal or a stay of the universal injunction. Ultimately, the case is likely to make its way up to the U.S. Supreme Court to decide the fate of the FTC’s proposed non-compete ban. 
• As a result of the Ryan decision, companies currently are not obliged to send out notices to current and former employees about the non-compete rule by September 4, 2024, unless and until the Fifth Circuit or the Supreme Court decides differently.
• Even though the FTC cannot enforce the non-compete rule, it still has the authority to investigate and bring individual enforcement actions against non-compete clauses that it determines violate Section 5 of the FTC Act. Non-compete clauses can also be unlawful under existing state law.
• As a result, companies may still find it beneficial to take stock of their existing non-compete agreements, including their reasonableness and business justifications, and to consider seeking legal advice on their legality and enforceability under state and federal law.

To the extent you have questions about how the rule or the court’s Order could impact you, please contact one of the Covington attorneys identified in this alert.