Federal Judge Blocks FTC’s Nationwide Ban on Non-Compete Agreements

Recently, a federal judge issued a nationwide injunction against the Federal Trade Commission’s (FTC) rule banning non-compete agreements that had been issued earlier this year. This decision was made in Texas in the case of Ryan LLC v. FTC. This ruling effectively halts the FTC’s non-compete rule. In July, the U.S. District Court for the Northern District of Texas granted the plaintiffs temporary relief by issuing a preliminary injunction that temporarily blocked the FTC rule from being applied to them. On August 20, 2024, the court clarified that the ruling would have a permanent, nationwide impact. This means that, for the time being, employers nationwide can still enforce current non-compete agreements against former employees who set up a business that competes with theirs or start working for a competitor.

Background on the FTC’s Non-Compete Rule

Earlier this year, the FTC issued a rule banning virtually all employer/employee non-compete agreements. Specifically, the FTC non-compete rule would prohibit employers from issuing new non-compete agreements to employees. Also, all existing non-compete agreements would be considered unenforceable after the rule takes effect. Under the FTC rule, only existing non-compete agreements for senior executives would remain in effect. Set to take effect on September 4, 2024, the rule required employers to send out a notice by that date to all individuals who had previously signed non-compete agreements, notifying them these agreements would become unenforceable under the new rule.

The Federal Court’s Decision

Judge Ada Brown reviewed competing summary judgment motions filed by the FTC, the Plaintiff, and related parties. Upon a thorough assessment, the judge ruled in favor of the Plaintiff. Judge Brown determined that by issuing the rule earlier this year, the Federal Trade Commission overstepped its statutory authority under the FTC Act and acted arbitrarily and capriciously in violation of the Administrative Procedures Act (APA). The judge clarified that the FTC has the authority to make “housekeeping” rules under the FTC Act but does not have the power to create substantive regulations like the one they issued earlier this year. Because of this, the judge held that she was obligated to set the non-compete rule aside and issue a permanent, nationwide injunction against the rule.

The FTC is expected to appeal this decision. Furthermore, this case is just one in three lawsuits seeking to block the FTC rule. In one of the other cases, the court concluded the rule was invalid and granted a preliminary injunction to the named plaintiffs. In the other case, the court denied the plaintiff’s motion and ruled that the FTC acted within its statutory authority when it issued the non-compete ban. These pending cases could lead to a circuit split, making the matter proceed to the U.S. Supreme Court. Even without the split, the Supreme Court may still agree to review the decision of whether to invalidate the law. This means that the FCT rule may still, eventually, take effect.

Additionally, employers must note that, even with this decision, non-compete agreements are still subject to existing federal and state laws. State laws that restrict or prohibit non-compete agreements apply with full force.

Contact a California Employment Lawyer

Contact a California employment lawyer if you have questions or need help with an employment law-related matter.