Court Blocks FTC Rule Banning Employment Noncompete Agreements on a Limited Basis

At a Glance

• The U.S. District Court for the Northern District of Texas has enjoined the FTC from implementing or enforcing its Rule banning noncompete agreements against the plaintiffs in Ryan LLC v. Federal Trade Commission.
• The district court declined the plaintiffs’ request for a nationwide injunction at this stage because plaintiffs had not briefed “why nationwide injunctive relief is necessary to provide complete relief to Plaintiffs, at this preliminary stage.” Therefore, this ruling itself does not alter the current September 4, 2024, effective date of the Rule as to all other employers.
• In ruling on the FTC’s lack of authority, the district court cited Loper Bright Enterprises v. Raimondo, decided by the U.S. Supreme Court days before the decision in Ryan LLC, which overruled the doctrine of judicial deference to administrative interpretation of federal laws established four decades ago in Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc. (known as Chevron deference).
• Although it now appears that the Rule is unlikely to go into effect on a national scale, employers should be aware of increasing judicial scrutiny of restrictive covenants, the National Labor Relations Board’s recent efforts to restrict the use of restrictive covenants, and state and local legislative proposals seeking to restrict or ban noncompetes.

On July 3, 2024, the U.S. District Court for the Northern District of Texas (the Court) issued a memorandum opinion and order that enjoined the U.S. Federal Trade Commission (FTC) from implementing or enforcing its Rule banning noncompete agreements for the vast majority of workers (the Rule) against the plaintiffs in Ryan LLC v. Federal Trade Commission. Although the preliminary injunction applies only to the plaintiffs in the Ryan action, the Court’s decision casts serious doubt as to whether the Rule will ever go into effect.

Here are the key takeaways: 

Scope

The preliminary injunction enjoins the FTC from implementing or enforcing its Rule with respect to the plaintiffs in that action only. The Court declined the plaintiffs’ request for a nationwide injunction at this stage because plaintiffs had not briefed “why nationwide injunctive relief is necessary to provide complete relief to Plaintiffs, at this preliminary stage.” Therefore, this ruling itself does not alter the current September 4, 2024, effective date of the Rule as to all other employers.

Reasoning

In issuing the preliminary injunction, the Court found that the plaintiffs had established a likelihood of succeeding on the merits because (1) the FTC exceeded its statutory authority in promulgating the Rule because it does not have the authority to promulgate substantive rules (as opposed to mere “housekeeping” rules) with respect to unfair methods of competition, and (2) the Rule is arbitrary and capricious because it is overly broad and without a reasonable explanation. In ruling on the FTC’s lack of authority, the Court cited Loper Bright Enterprises v. Raimondo, decided by the U.S. Supreme Court days before the decision in Ryan, which overruled the doctrine of judicial deference to administrative interpretation of federal laws established four decades ago in Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc. (known as Chevron deference). Prior to the Loper Bright decision, courts deferred to an enforcing agency’s reasonable interpretation of an ambiguous statute. After Loper Bright, courts will give less deference to an applicable agency’s statutory interpretation.

What’s Next?

The Court has stated that it intends to issue a ruling on the merits on or before August 30, 2024 — just a few days before the Rule’s September 4 effective date. The Court could, at that point, expand its next ruling to provide nationwide relief. 

What Does This Mean for Employers?

The Court’s reasoning in Ryan paired with the Supreme Court’s recent Loper Bright decision spells major trouble for the Rule. While the preliminary injunction in Ryan applies only to the Ryan plaintiffs, it is unlikely that the Rule will go into effect given the Court’s broad-based rejection of the FTC’s authority to promulgate the Rule and its justifications for the Rule. 

Other Legal Challenges to the Rule

Another challenge to the Rule is ongoing in the U.S. District Court for the Eastern District of Pennsylvania. The court in that case, ATS Tree Services, LLC v. Federal Trade Commission, is scheduled to hold a hearing on the motion for preliminary injunction on July 10, 2024, and the district court has stated that it will issue a decision on that motion by July 23, 2024. That decision could follow, expand upon or conflict with the Ryan decision. We expect that a nationwide injunction issued in either action would moot the issue in the other.

Other Efforts to Ban Noncompetes

Although it now appears that the Rule is unlikely to go into effect on a national scale, employers should be aware of increasing judicial scrutiny of restrictive covenants, the National Labor Relations Board’s (NLRB) recent efforts to restrict the use of restrictive covenants, and state and local legislative proposals seeking to restrict or ban noncompetes. With regard to recent NLRB activity, the U.S. Court of Appeals for the District of Columbia Circuit in Hospital de la Concepcion v. NLRB noted, without citing to Loper Bright or Chevron, that courts would set aside an NLRB order only if it departed from established precedent without reasoned justification. Other courts are likely to follow because, prior to the now-discarded Chevron decision, the courts deferred to the NLRB as uniquely positioned to craft labor policy.

We will continue to monitor these important developments and, like our prior alerts on this topic, address questions raised by the Rule and the business and legal implications for employers.