On July 3, in Ryan, LLC v. Federal Trade Commission, a federal district court in Texas issued a preliminary injunction in a challenge to the Federal Trade Commission’s recent rule banning non-compete agreements. The injunction suspended enforcement of the rule pending a final decision on the merits, but the ruling applies only to the named parties in that case. The Texas court declined the plaintiffs’ request to impose a broader, nationwide injunction. The court also announced that it would issue its final decision on or before Aug. 30 — just a few days before the rule’s Sept. 4 effective date.
The decision last week provides the first look into how the Ryan court may ultimately rule: in the court’s view, the plaintiffs are likely to prevail on their legal challenge to the validity of the FTC’s rule. In particular, the court determined that:
- The FTC lacked congressional authority under the Federal Trade Commission Act to issue its non-compete ban, basing its determination on an analysis of the text, structure and history of that statute.
- The broad non-compete ban is arbitrary and capricious. The court found that the rule is based on “inconsistent and flawed empirical evidence, fails to consider the positive benefits of non-compete agreements, and disregards the substantial body of evidence supporting these agreements.” Additionally, the court found that the FTC insufficiently addressed alternatives to the rule that would provide narrower relief.
The court also determined that there would be irreparable harm to the parties if a temporary injunction were not issued. It concluded, however, that the plaintiffs had not sufficiently briefed their basis for seeking a nationwide injunction and, as a result, limited this relief to the parties in the case: Ryan LLC, the U.S. Chamber of Commerce and several other business groups that intervened in the case. Accordingly, as of now, the Ryan court’s ruling does not result in a suspension of the effective date of the non-compete ban for any employers other than the parties to that litigation.
Stay tuned for further developments. In particular, in its upcoming final ruling, the Texas court could revisit its decision about the scope of relief and instead impose a broader permanent injunction that would apply nationwide. In addition, a second federal court is set to take up a separate challenge to the non-compete ban. On July 10, in ATS Tree Services, LLC v. Federal Trade Commission, a federal court in the Eastern District of Pennsylvania will hold a hearing on a motion for a preliminary injunction to delay enforcement of the FTC’s rule. The judge in the Pennsylvania litigation has indicated that she will rule on this motion by July 23.
In short, the FTC’s non-compete rule appears to be in some jeopardy, but the Sept. 4 effective date for employers (other than the parties to the Texas litigation) remains in place for the time being, resulting in continued uncertainty. As we wait to see the outcome of the legal challenges in both Ryan and ATS Tree Services, employers would be wise to begin considering recommended steps to plan for the possible implementation of the FTC’s non-compete rule as outlined in our previous alert.
