FTC Noncompete Ban Blocked By Federal Court

In August of this year, a Texas federal court blocked the Federal Trade Commission's Noncompete Rule (16 C.F.R. Section 910.1-6) (Final Rule) on a nationwide basis for all employers. The Final Rule would have banned nearly all noncompetes for most types of workers and was set to go into effect on Sept. 4, 2024. Despite this favorable ruling, the future of the Final Rule is uncertain because of ongoing litigation in other jurisdictions. The Circuit Courts of Appeal and the U.S. Supreme Court may ultimately be asked to weigh in, and the outcome of the upcoming election in November may also have an impact on the Final Rule's fate.

The FTC Rule

On April 23, 2024, the Federal Trade Commission (FTC) approved the Final Rule banning most noncompete agreements as an unfair method of competition in violation of Section 5 of the FTC Act. The Final Rule's definition of noncompete is broad and includes any term or condition that in any way impacts the ability of a worker to seek or accept employment with another business or to operate their own business after the working relationship ends. It also extends beyond traditional employees to include independent contractors, volunteers, and externs or interns. The Final Rule would exclude pre-existing noncompetes with "senior executives," defined as employees who are in "policy-making" positions and earn more than $151,164 per year. All other pre-existing noncompetes would have become void as of the effective date of the Final Rule on Sept. 4, 2024, and even future noncompetes with "senior executives" would have been prohibited following the effective date of the Final Rule. Additionally, employers would have been required to provide current and past workers who previously entered into a noncompete written notice that they would not be enforcing the noncompetes.

Ryan LLC Files for An Injunction

Mere hours after the FTC issued the Final Rule, Ryan LLC, a Texas employer and tax preparation company (the Plaintiffs) filed a complaint against the FTC in the U.S. District Court for the Northern District of Texas. The U.S. Chamber of Commerce and a few other business groups subsequently intervened into the case. Plaintiffs based the complaint on the Administrative Procedures Act (APA), which grants courts with oversight over agency actions and empowers courts to determine those actions to be unlawful and set them aside. Plaintiffs then filed a motion to stay the effective date of the Final Rule and to preliminarily enjoin the FTC from enforcing the rule. Plaintiffs asserted that: 1) the FTC had no statutory authority to create the Final Rule; 2) the Final Rule is the result of an unconstitutional exercise of power; and 3) the FTC's acts, findings, and conclusions in enacting the Final Rule were arbitrary and capricious.