Texas Court Stays Effective Date of FTC’s Non-Compete Ban But Only for the Plaintiff in the Case
On July 3, 2024, a Texas judge issued an opinion blocking the Federal Trade Commission’s (“FTC”) Rule set to take effect September 4, 2024, which bans most employment non-compete agreements. The opinion, however, limited the injunction to the plaintiffs in the case and the court did not issue a nationwide ban. The court will issue a final decision on the merits of the FTC non-compete ban by August 30, 2024.
Recommendation to Business Owners
The Texas Court held that “Plaintiffs are likely to succeed on the merits that the FTC lacks statutory authority to promulgate the Non-Compete Rule, and that the Rule is arbitrary and capricious.” Accordingly, there is good reason to believe that the Texas court will ultimately strike down the FTC ban when it issues its decision on the merits on August 30. However, due to the proliferation of new state statutes and court decisions regarding non-compete agreements, it is a critical time for business owners to update existing agreements and review and strengthen intellectual property protection and trade secret/confidentiality practices.
Pending Litigation Over the FTC Rule
As we discussed in our April 24, 2024 bulletin update, the FTC ban on non-compete agreements is scheduled to go into effect on September 4, 2024.
FTC Rule 3084-AB74 was announced on April 23, 2024 and immediately triggered lawsuits. Ryan, LLC, a tax service and software firm, filed a lawsuit hours after the Rule was announced. See Ryan LLC, v FTC, No. 3:24-CV-00986-E (E.D. Tex.). Another lawsuit was filed the next day by the Chamber of Commerce of the United States of America, Business Roundtable, Texas Association of Business, and Longview Chamber of Commerce. See Chamber of Commerce v. FTC, No. 24-cv-00148 (E.D. Tex.). ATS Tree Services, LLC filed a similar action against the FTC in the Eastern District of Pennsylvania. See ATS Tree Services, LLC v. Federal Trade Commission, No. 2:24-cv-01743 (E.D. Pa.). The court in ATS Tree Services is scheduled to issue a ruling by July 23, 2024, which raises the possibility of conflicting opinions in similar pending litigation concerning the FTC Rule.
In Ryan, the plaintiff filed a motion to stay the effective date of the Rule and for a preliminary injunction. Ryan was the first case filed challenging the Rule and became the battleground to determine its enforceability. Because Ryan was filed first, the presiding judge in Chambers stayed the case for comity considerations. As a result, the Chambers plaintiffs successfully intervened as plaintiffs in Ryan. As expected, the intervening plaintiffs in Ryan filed a similar motion to stay the effective date of the Rule and for a preliminary injunction.
On July 3, 2024, the Texas judge in Ryan blocked the Rule’s effective date, finding that non-competes are “judicially recognized as lawful and beneficial to the public interest…maintaining the status quo and preventing the substantial economic impact” and that the FTC did not have authority to implement the Rule. However, the ruling applies only to the plaintiffs in that case. A final decision on the merits is expected on August 30, 2024, just four days before the Rule is set to take effect. Due to the short timeframe between the final anticipated ruling and the preliminary ruling, it is very possible that the Ryan court will issue a decision invalidating the Rule and that the FTC will promptly appeal the decision to the Fifth Circuit Court of Appeals. In light of the expected continued litigation, particularly the possibility of conflicting opinions in Ryan and ATS Tree Services, businesses should continue to prepare for the possibility of the FTC Rule banning non-competes to take effect on September 4, 2024.
For more information or any questions, please contact Norman Finkel at [email protected] or Marc Pawlus at [email protected], or call (312) 648-2300.
