US District Court Enjoins Federal Trade Commission’s Noncompete Rule For The Named Plaintiffs

On July 3, the US District Court for the Northern District of Texas issued a decision and order enjoining the Federal Trade Commission (FTC) from enforcing its final rule banning most noncompete agreements.

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This decision is the expected outcome of the suit. Notably, the court expressly declined to issue a nationwide injunction. Instead, the injunction is limited to the named plaintiffs and does not stay the FTC’s noncompete rule for others. The court stated its intent to issue a final decision on the merits by August 30, which is days before the September 4 effective date of the FTC’s rule.

On April 23, the FTC voted 3-2 to publish a final rule with sweeping effects, purporting to bar prospectively and invalidate retroactively most employee noncompete agreements. Three lawsuits have been filed challenging the FTC’s rule: (1) Ryan, LLC v. FTC, 24-cv-986 (N.D. Tex.); (2) Chamber of Commerce v. FTC, 24-cv-148 (E.D. Tex.); and (3) ATS Tree Services, LLC v. FTC, 24-cv-1743 (E.D. Pa.). The Northern District of Texas previously stated its intent to issue a decision on whether to enjoin and stay the FTC’s rule by July 3.

The Northern District of Texas’s decision holds that plaintiff Ryan, LLC (and the US Chamber of Commerce, which was previously granted leave to intervene as a plaintiff) satisfied each of the criteria necessary for a preliminary injunction. The court’s analysis of the likelihood of success on the merits is the more noteworthy portion of the opinion. The district court’s decision holds that the plaintiffs are likely to prevail on their objections that the FTC’s rule exceeds the FTC’s statutory authority and is arbitrary and capricious.

The Eastern District of Pennsylvania previously stated its intent to rule on plaintiff ATS Tree Services, LLC’s motion for a preliminary injunction by July 10. It will be noteworthy whether that court defers, entirely or partially, under principles of comity to the decision of the Northern District of Texas or instead undertakes its own independent analysis of the likelihood of success on the merits. It will likewise be notable whether any such injunction is nationwide in scope or limited to the named plaintiffs. Though less likely, there is the potential for competing rulings on whether the FTC’s rule should be enjoined pending a final outcome on the merits.

The Northern District of Texas’ decision to stay the FTC rule follows closely in time a series of US Supreme Court decisions curtailing federal agency authority (see our client alerts on the overruling of Chevron, Corner Post, and Jarkesy). The overruling of Chevron deference increases the likelihood that the FTC noncompete rule will ultimately be struck down.

The FTC’s noncompete rule remains relevant even if it is ultimately struck down for reasons we have discussed previously. Regardless of whether the final rule ultimately survives legal challenge, employers should anticipate that noncompete enforcement in the coming years will remain uncertain as the courts, legislatures, and government agencies continue to erode the legal and policy justifications for employee noncompetes. This counsels in favor of a “belt and suspenders” approach for employers to protect their legitimate business interests rather than relying solely on noncompetes.

ArentFox Schiff has been providing coverage of this issue since January 2023 when the FTC first issued its notice of proposed rulemaking. Our dedicated webpage, which includes the current status of the rule, past alerts, and additional resources, can be found here. We’ll continue to update our dedicated webpage as the litigation proceeds.