Federal Judge Issues Limited Preliminary Injunction Against FTC Non-Compete Ban

July 8, 2024

As discussed in prior posts (most recently here), the Federal Trade Commission (“FTC”) earlier this year proposed a near complete ban on the use of non-competes (the “Rule”). The Rule was promptly challenged by Ryan LLC, a Texas tax services firm, in the United States District Court for the Northern District of Texas. Ryan LLC, et al. v. FTC, No. 3:24-CV-00986-E, 2024 WL 3297524 (N.D. Tex. July 3, 2024).  Ryan asserted causes of action against the FTC based on (i) the Administrative Procedure Act, which empowers a reviewing court to hold unlawful and set aside certain agency actions, findings, and conclusions; and (ii) the Declaratory Judgment Act, challenging the Rule as unlawful.  More specifically, Ryan alleged that the FTC’s actions were unlawful because (i) the FTC acted without statutory authority; (ii) the Rule is the product of an unconstitutional exercise of power; and (iii) the FTC’s acts, findings, and conclusions were arbitrary and capricious.  Ryan sought an order staying the effective date of the Rule (September 4, 2024) and preliminarily enjoining the FTC from enforcing the Rule, including but not limited to, any ongoing or future administrative action.

Last week, on July 3, the court granted Ryan’s motion in part, finding that the FTC exceeded its statutory authority in promulgating the Rule, and that the FTC’s Rule on this issue was arbitrary and capricious. The Ryan court’s decision cited to the Supreme Court’s Loper decision, which was issued just days earlier, overturning the longstanding Chevron decision which required deference to agency determinations. Loper Bright Enterprises v. Raimondo, No. 22-1219, 2024 WL 3208360 (U.S. June 28, 2024).

Although the Ryan decision is preliminary, it is unlikely that the court will reach a different result in its final determination on the merits, which is expected at the end of August.  A critical issue that remains, however, is the scope of the injunction.  Currently, the Ryan court’s injunction applies just to the parties in the case—the court declined to issue a nationwide injunction. Without a broader injunction, the FTC’s Rule has only been stayed and enjoined for the named plaintiff and plaintiff-intervenors.  Depending on the scope of this court’s subsequent decision, everyone else could remain subject to the Rule when it is scheduled to go into effect on September 4.

In the meantime, another challenge to the FTC Rule is pending in Pennsylvania federal court, with oral arguments scheduled for July 10 and a decision expected a couple weeks later.  See ATS Tree Services, LLC v. FTC, No. 2:24-CV-1743 (E.D. Pa.).  It remains to be seen whether the Pennsylvania court will contradict, follow, or even possibly expand the Texas court’s rulings.

We will continue to post updates so that employers and employees are aware of their obligations as the (potential) September 4 effective date approaches.

For more information on this issue or other employment matters, please contact:

Carol M. Goodman at +1 212 592 1465 or [email protected]
John H. Chun at +1 212 592 1546 or [email protected]
Basil C. Sitaras at +1 212 592 1572 or [email protected]

© 2024 Herrick, Feinstein LLP. This alert is provided by Herrick, Feinstein LLP to keep its clients and other interested parties informed of current legal developments that may affect or otherwise be of interest to them. The information is not intended as legal advice or legal opinion and should not be construed as such.