Client Alert: Texas Court Puts FTC’s Noncompete Ban on Hold

Jul 18, 2024

The Federal Trade Commission’s (“FTC”) Non-Compete Rule (“Rule”) seeking to prohibit restrictive covenants in employment agreements, which are aimed at preventing employees from competing with former employers, is off to a tumultuous start.

On July 3, 2024, U.S. District Judge Ada Brown in the Northern District of Texas struck a major blow to the FTC’s Rule granting a preliminary injunction staying the effectiveness of the Rule, but only as to the parties to that case, until an ultimate decision on the merits can be made, which the Judge has indicated will be made by August 30, 2024.

By way of background, non-compete agreements are long-established private economic regulations, dating back to the 1700s British pre-founding common law of contracts. The states have historically regulated non-competes through case law and statute. Indeed, 31 states and Washington, D.C. have statutes that govern non-competes and 19 states utilize common law. Only California (since 1872), North Dakota (since 1865), Oklahoma (since 1890), and Minnesota (since 2023) ban the use of non-competes in most circumstances. Colorado, Washington, Oregon, Illinois, Virginia, Maine, Maryland, Rhode Island, New Hampshire, and D.C. restrict non-competes based on widely varying income thresholds. For example, D.C.’s statute prohibits non-competes for employees earning less than $150,000 whereas New Hampshire uses 200% of the federal minimum wage or (currently) $30,160 as its threshold. Many other states analyze the reasonableness of individual non-compete agreements to ensure that they protect the legitimate interests of the employer, impose no undue hardship on the employee (requiring the duration, geographic area, and scope of activity to be appropriately tailored), and are not injurious to the public.

Proposed legislation is currently pending in at least 12 states seeking to regulate non-compete agreements in some way, including New Jersey’s proposed bill that has been introduced 4 times since 2017 and has never made it past the Assembly Oversight, Reform and Federal Relations Committee and Pennsylvania’s proposal introduced about a year ago related specifically to health care workers. New York’s recent proposed legislation was passed in both houses before being vetoed by the Governor in December 2023. Additionally, despite several attempts – most recently the Workplace Mobility Act – no federal law broadly addresses the enforceability of non-competes.

It is against this backdrop that the FTC sought to step in and drastically alter the non-compete landscape. Specifically, the Rule would categorically ban all non-compete agreements moving forward subject to limited exceptions related to the sale of a business or ownership interest. As for pre-existing non-compete agreements, they would be retroactively invalidated except for senior executives earning over $151,164 annually and who are in a “policy-making position.” By the FTC’s estimate, the new Rule would impact approximately one in five American workers, or approximately 30 million workers, who are subject to a non-compete agreement.

The FTC made its proposal on January 19, 2023, and adopted the final Rule on April 23, 2024. The same day, Ryan LLC, a global tax services firm, filed a suit seeking to invalidate the Rule. On May 1, 2024, Ryan filed a Motion for a Stay of the Effective Date of the Rule and a Preliminary Injunction. On July 3, 2024, Judge Brown granted Ryan’s request.

Judge Brown issued a very thorough and well-reasoned opinion, which 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[.]” Judge Brown’s decision details that the FTC’s historical abilities in this arena are limited to “case-by-case administrative adjudication” and most of the FTC’s powers are investigatory or ministerial in nature.

Judge Brown’s ruling, although preliminary, indicates that, ultimately, the Rule is likely to be overturned. By way of example, the Court concluded: (1) the FTC “has exceeded its statutory authority”; (2) “there is a substantial likelihood the Rule is arbitrary and capricious because it is unreasonably overbroad without a reasonable explanation”; and (3) “the FTC insufficiently addressed alternatives to issuing the Rule.”

Most problematic for the countless companies watching this litigation to determine if they will have to comply with the Rule, Judge Brown limited the scope of the injunctive relief granted only to the named Plaintiffs in that case. The Court refused to extend the decision to impose a nationwide ban. However, Judge Brown indicated a decision on the merits would be made by August 30, 2024, before the Rule’s September 4, 2024, effective date, and set a briefing schedule aimed at meeting that deadline.

Separately, a case is pending in the Eastern District of Pennsylvania brought by ATS Tree Services, LLC against the FTC. Oral argument was held before U.S. District Judge Kelley Brisbon Hodge on July 10, 2024, regarding the request for preliminary injunctive relief, but no decision has yet been issued.

If you have a question about how this new Rule may affect your non-compete agreement(s) or what options you may have moving forward, please contact attorney Kory Ann Ferro or attorney Kelly Purcaro.

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Client Alert: Texas Court Puts FTC’s Noncompete Ban on Hold

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