The FTC and Non-Compete Agreements: What the Recent Federal Court Ruling Means

This is the second article from Strauss Troy in a series on the Federal Trade Commission’s (“FTC”) recent rule on post-employment non-competition agreements. If you missed the first article, which discusses the scope and practical realities of the FTC’s non-compete ban, you can read it here.

Immediately after the FTC issued its new rule in April, which bans most existing non-compete agreements with several notable exceptions, a tax services firm called Ryan, LLC, joined by the U.S. Chamber of Commerce and several other interested business groups, filed suit against the FTC in the Northern District of Texas in an attempt to block the rule. The challengers alleged that the FTC lacks authority to enact such a rule, and that this is a legislative action that the United States Congress cannot delegate to the FTC.

On July 3, 2024, the Northern District of Texas court granted a preliminary injunction and postponed the effective date of the rule as it applies to the plaintiffs in that case. In granting the preliminary injunction, the court found that the “text, structure, and history” of the sections of the FTC Act cited by the FTC in support of its rule “reveal that the FTC lacks substantive rulemaking authority with respect to unfair methods of competition[.]” The court also found that the FTC’s rule “imposes a one-size-fits-all approach with no end date” targeting all virtually all forms of non-compete agreements, rather than just those the FTC’s studies have found to be specifically harmful.

The court observed that non-compete agreements have long been “judicially recognized as lawful and beneficial to the public interest” and that “maintaining the status quo and preventing the substantial economic impact” of the final rule would not inflict harm on the FTC.

The ruling keeps the FTC form enforcing the non-compete ban only against the parties and not to every employer in the country. However, the court said that it would enter a final order on the merits of the challenge by August 30, 2024, just a few days before the September 4, 2024, date which the FTC’s rule would otherwise go into effect. That ruling is expected to have nationwide implications. The FTC may also appeal the preliminary injunction and, if necessary, any final decision on the merits to the United States Court of Appeals for the Fifth Circuit.

While there are other active legal challenges to the FTC’s non-compete ban, the Ryan, LLC case is the furthest along thus far, and the court’s decision on the merits is sure to invite even more challenges to the FTC’s rule nationwide. Much more will likely develop in this area in the coming months.

The team at Strauss Troy is continuing to closely monitor the Ryan, LLC case and other challenges to the FTC’s new rule and will continue to provide updates as the situation develops. Please contact one of our team members with any questions or concerns you may have.

Stephen S. Schmidt: ssschmidt@strausstroy.com or 513.629.9422
Andrew D. White: adwhite@strausstroy.com or 513.629.9466