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Texas District Court Narrowly Stays and Enjoins FTC's Non-Compete Rule


On July 3, 2024, the U.S. District Court for the Northern District of Texas issued a limited stay and preliminary injunction of the Federal Trade Commission's (FTC) final rule that would render almost all non-compete agreements, with very limited exceptions, unenforceable (commonly referred to as the "Non-Compete Rule").

A judge's gavel sitting on top of a book labeled
A judge's gavel sitting on top of a book labeled "Employment Law."

Rejecting the request for a nationwide injunction, the court limited the injunction to enforcement of the Non-Compete Rule against the named and intervenor plaintiffs in the action. Therefore, for any employer that was not a plaintiff or plaintiff-intervenor in the action, the Non-Compete Rule is still set to take effect on September 4, 2024, although the court's opinion clearly casts doubt on the long-term viability of the Non-Compete Rule.

The Court's Ruling

The court's decision, in Ryan, LLC v. Federal Trade Commission to grant a stay and preliminary injunction of the Non-Compete Rule was based on two primary bases:

First, the court found that the FTC lacks the substantive rulemaking authority under Section 6(g) of the FTC Act to promulgate the Non-Compete Rule. The court concluded that the FTC's historical and statutory context does not support the Commission's claim to such statutory authority.

Second, the court also agreed with the plaintiff's argument that the Non-Compete Rule appears to be arbitrary and capricious in violation of the requirements of the Administrative Procedure Act (APA). Among other things, the court noted that the Non-Compete Rule's broad, blanket prohibition on non-compete agreements, without a detailed explanation and consideration of less-disruptive alternatives, did not establish a rational connection between the facts and the regulatory decision.

Limited Scope of the Stay and Injunction

Importantly, the court's current preliminary injunction applies only to the named and intervenor plaintiffs in this case: Ryan LLC, the Chamber of Commerce of the United States of America, Business Roundtable, Texas Association of Business, and Longview Chamber of Commerce. This means that for these specific parties, the Non-Compete Rule will not take effect on September 4, 2024. The court declined to issue a nationwide preliminary injunction and further declined to extend the preliminary injunction to the members of the organizational plaintiffs, such as members of the Chamber of Commerce of the United States, citing a lack of adequate briefing from the parties on associational standing. The court did recognize, however, that "it is evident that if the requested injunctive relief is not granted, the injury to both Plaintiffs and the public interest would be great." It would, therefore, not be surprising to see additional briefing focused on these issues before a final decision on the merits is made.

What now?

For the named plaintiff and plaintiff-intervenors, the effective date of the Non-Compete Rule has been stayed and its enforcement has been enjoined until the court's final adjudication on the merits, which the court states it intends to complete on or before August 30, 2024. In the meantime, the U.S. District Court for the Eastern District of Pennsylvania is scheduled to rule on an injunction request regarding the Non-Compete Rule by July 23, 2024, in ATS Tree Services, LLC v. Federal Trade Commission. Whether a decision from the Eastern District of Pennsylvania or a final decision in the Northern District of Texas on August 30, 2024, will involve broader injunctive relief remains to be seen.

In the meantime, it is advisable for employers to take a wait-and-see approach to these fast-moving developments, but also consult legal counsel and start evaluating what the appropriate strategy will be for their particular organization (after balancing the various risks involved) with respect to the Non-Compete Rule's notice requirement in the event the picture remains inconclusive as the September 4, 2024, notice deadline approaches.

Posted In: Non-Compete Clause (Restrictive Covenant), Non-Disclosure Agreement (NDA)

Want to know more? Read the full article by at Littler Mendelson

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