FTC Appeals Texas District Court Ruling That Blocked Noncompete Ban to Fifth Circuit

Quick Hits

• The FTC filed a notice of appeal to challenge an August ruling that set aside its noncompete ban with nationwide effect.
• The appeal comes after the FTC appealed a similar preliminary injunction ruling by a federal court in Florida.
• The FTC’s noncompete ban, if implemented, would effectively ban nearly all noncompete agreements between employers and employees.

On October 18, 2024, the FTC filed a notice of appeal to challenge the August 2024 ruling by the U.S. District Court for the Northern District of Texas in Ryan LLC v. Federal Trade Commission that blocked the FTC’s final rule implementing the noncompete ban.

In that ruling, U.S. District Judge Ada Brown found that the FTC exceeded its statutory authority in issuing the rule, which sought to ban nearly all noncompete agreements in the employment context, and found the rule was “arbitrary and capricious.” The ruling expanded an earlier preliminary injunction with Judge Brown ordering that the rule be set aside with nationwide effect.

The FTC’s final rule, which it approved in a 3–2 vote in April 2023, had been scheduled to go into effect on September 4, 2024. 

Additionally, the FTC has appealed a preliminary injunction ruling by the U.S. District Court for the Middle District of Florida in Properties of the Villages, Inc. v. Federal Trade Commission. The court, in that case, found that the FTC’s rule is likely improper under the “major questions doctrine,” which requires agencies to “point to clear congressional authorization” when they issue rules of “extraordinary … economic and political significance.”

The appeal in the Ryan case also comes weeks after a Pennsylvania company dropped its legal challenge to a ruling denying a preliminary injunction by the U.S. District Court for the Eastern District of Pennsylvania. The judge in that case, ATS Tree Services, LLC v. Federal Trade Commission, had refused to issue a stay pending the appeal in the Properties at the Villages case and the then-anticipated appeal in the Ryan case.

In July 2024, the judge in ATS Tree Services found the FTC had acted “within its authority under the [FTC] Act in designating all non-compete clauses as ‘unfair methods of competition.’” The judge also rejected the company’s arguments that it would “suffer irreparable harm” to its contractual rights and investments in specialized training for its employees if the rule goes into effect.

The FTC noncompete rule, if implemented, would effectively ban all noncompete agreements or provisions that are functionally noncompete agreements between employers and workers as “unfair method[s] of competition.” The rule would further require employers to stop enforcing most existing such agreements and notify their employees that any such agreements would no longer be enforceable.

Next Steps

For now, the FTC noncompete ban remains enjoined under the ruling in the Ryan case. The rule will now be considered by the Fifth Circuit, which opponents of the rule view as a more favorable venue. The issue will likely end up before the Supreme Court of the United States, but most experts believe that the FTC rule will still not survive. Employers may want to stay tuned.

Going forward, employers should continue focusing on state law compliance and narrow drafting of all restrictive covenants to achieve only the protections that legitimate business interests require, particularly given the increasing scrutiny of noncompete agreements and other restrictive covenants by state and federal lawmakers and regulators.

Ogletree Deakins’ Unfair Competition and Trade Secrets Practice Group will continue to monitor developments and will provide updates on the Unfair Competition and Trade Secrets blog as additional information becomes available.

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