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On July 3, 2024, Judge Ada Brown, a federal judge in the Northern District of Texas, entered an order blocking the FTC’s Non Compete Final Rule banning noncompete agreements. However, the Court stayed the FTC’s rule temporarily and only for the five plaintiffs who filed the lawsuit, not nationwide or even statewide. The Court’s final opinion is due on August 31, 2024.
At Gardner Employment Law, we stay up-to-date with the latest developments on the FTC’s Final Rule banning non-competes. Read on to learn more about the status on the ruling.
Why Did a Texas Federal Court Halt the FTC’s Non-Compete Rule?
The U.S. District Court for the Northern District of Texas issued a preliminary injunction against the FTC (Federal Trade Commission) because the federal judge did not read the controlling statute to support the FTC’s Rule. The court found several critical issues with the FTC’s attempt to enforce the rule:
- Statutory Overreach: The court determined that the FTC likely overstepped its legal bounds. Specifically, the FTC had relied on Section 6(g) of the FTCA (Federal Trade Commission Act) as authority for its rule. However, the court interpreted this section as a “housekeeping statute” meant only for internal agency procedures, not for creating substantive regulations affecting the public.
- Legislative Intent: The District Court analyzed the legislative history of the FTCA and concluded that Congress did not intend that Section 6(g) to permit the FTC to create new rights, only to issue procedural rules to carry out the Act.
- Precedent and Influence: Although the ruling currently only applies to the plaintiffs in the Ryan case, the court’s reasoning points to a broader skepticism about the FTC’s authority to implement such sweeping changes without clear legislative backing.
The implications of this preliminary injunction are substantial. It may set a precedent that could influence other courts considering similar challenges.
Why Did the Court Find the FTC’s Rule Arbitrary and Capricious?
The reason that the District Judge labeled the FTC’s rule banning non-competes “arbitrary and capricious” was because, in the judge’s opinion, the rule banning non-competes imposed “a one-size-fits-all approach with no end date, which fails to establish a rational connection between the facts found and the choice made.” Opinion at page 21. The court noted that the FTC relied on studies that examined the economic effects of various state policies toward non-competes. However, none of those states had ever enacted a non-compete rule imposing a categorical ban on non-competes. In other words, the FTC’s rule that would prohibit entering or enforcing virtually all non-competes was too broad. Instead, the court said that the FTC should have targeted specific, harmful non-competes.
Furthermore, the court emphasized the potential for irreparable harm to businesses if the rule were enforced. The plaintiffs argued that compliance with the rule would cause significant financial injury, as it would open the door for departing employees to take proprietary information to competitors, leading to unfair competitive advantages and financial losses. The court found this argument compelling and indicative of the rule’s potentially damaging impact on businesses.
Judge Brown’s broad judicial discretion also played a crucial role in this case. District judges have wide latitude to determine what evidence is admissible and what is not. In this case, Judge Brown exercised this discretion to closely scrutinize the FTC’s factual justifications for the rule, ultimately finding them insufficient. This scrutiny underlined the court’s conclusion that the rule was not legally sustainable.
What Are the Implications of the Court’s Order in the Ryan case?
The preliminary injunction has immediate and long-term implications for employees and employers alike. Although the injunction currently applies only to the Ryan plaintiffs, it sets the stage for broader legal challenges. The court’s final ruling on the merits, expected by August 30, 2024, will be conclusive in the Ryan case. If the court maintains its stance, the ruling could prevent the FTC’s rule from taking effect nationwide, or the court could continue to apply its order only to the plaintiffs in that one case. After September 4, 2024, the FTC’s rule will go into effect for everyone in Texas except the Ryan plaintiffs and executives. After that date, no new non-compete agreements will be permitted.
Are There Other Lawsuits that Could Affect Non-Compete Agreements?
There are two cases that closely relate to the Ryan case. ATS Tree Services, LLC v. FTC, which involves the same issues, is pending in the Eastern District of Pennsylvania, with a decision expected soon. The Pennsylvania decision could either reinforce or challenge the Northern District of Texas court’s decision, further influencing the rule’s future. You should stay vigilant and prepared for potential changes, especially as these legal battles unfold.
The Supreme Court’s recent decision in Loper Bright Enterprises v. Raimondo overruled the longstanding “Chevron deference” rule. Decades ago in a case involving Chevron Oil Company, the Supreme Court held that when a statute’s language is not clear, a court should defer to an agency’s expertise in interpreting what Congress intended. That rule is gone. Together, the Loper Bright and Ryan opinions spell major trouble for the FTC’s rule banning non-competes. This shift means that courts will now give less deference to an agency’s statutory interpretation, impacting the rule’s enforceability.
What Should We Do Until the FTC’s Non-Compete Rule Is Either Approved or Rejected?
Until “the dust settles” and all appeals have been exhausted, the safest approach is to continue applying the Texas non-compete statute. Although the Texas opinion setting the FTC rule aside currently applies only to those plaintiffs, it is more likely that the Ryan order will be applied by other courts. In the interim period until the final answer, most likely by the Supreme Court, it is wise to continue to apply the same analysis as before the FTC promulgated its rule, i.e., no ban on non-competes.
Here are some practical steps for both employees and employers:
- Review Existing Agreements: Evaluate current non-compete agreements to ensure they are legally sound under existing state laws.
- Explore Alternatives: Consider using other protective measures, such as confidentiality and non-disclosure agreements, which may be less likely to face legal challenges.
- Stay Informed: Keep abreast of ongoing legal developments and adjust strategies accordingly. Legal counsel can provide guidance tailored to specific business needs and jurisdictions.
In short, go back to the old analysis – and stay tuned!
Contact an Expert
It may take some time before the courts reach a final decision on the FTC’s non-compete ban. At Gardner Employment Law, we closely follow the latest updates to keep our clients well-informed and prepared for any developments. If you have questions about how this may affect your non-compete, contact us today.