CSG Law Alert: U.S. District Court Halts Enforcement of the FTC’s Final Rule on Non-Competes
In our previous CSG Law Alert that examined the Federal Trade Commission’s (the “FTC”) Final Rule to bar non-competition clauses, we predicted that federal court challenges would at least delay enforcement of the Final Rule for the foreseeable future. A Texas district court has done exactly that.
By way of background, on January 5, 2023, the FTC announced the Proposed Rule, which would effectively ban companies from imposing non-competes on their personnel. Then, on April 23, 2024, the FTC—in a 3-2 vote that was split along political party lines—issued the Final Rule that, among other things, generally bars employers from enforcing new or existing covenants not to compete with limited exceptions for a narrowly defined group of “Senior Executives.” As predicted in our initial CSG Alert, the Final Rule has been challenged, and, as of July 3, 2024, has been “stayed” through at least August 30, 2024, and likely stayed for the foreseeable future.
Specifically, in the case Ryan LLC v. Federal Trade Commission1, brought in the U.S. District Court for the Northern District of Texas, the district court ruled that the plaintiffs—including a global tax services and software provider—challenging the FTC’s Final Rule had a strong likelihood of success on their claims and entered a preliminary injunction against enforcement of the Final Rule through at least August 30, 2024. The district court granted a stay and preliminary injunction after finding that (i) the plaintiffs are likely to succeed on the merits of their challenge because the FTC lacks substantive rulemaking authority with respect to unfair methods of competition, rendering the Final Rule arbitrary and capricious; (ii) irreparable harm will result without the issuance of injunctive relief; and (iii) the balance of harms and public interest weigh in favor of granting injunctive relief. Further, the district court also determined that compliance with the Final Rule would result in financial injury, given the plaintiffs’ nonrecoverable costs of complying with the Final Rule, and unfairly render long-standing contractual agreements—which have been judicially recognized as lawful and beneficial to the public interest—as unenforceable, thereby causing injury to both the plaintiffs and the public interest.
In sum, the Final Rule is on hold and will likely remain on hold for the foreseeable future. Although the Final Rule was not scheduled to go into effect until September 4, 2024, the district court advised that it would have a final decision with respect to the challenge to the Final Rule before then. Notably, the district court only ruled on one of many challenges to the Final Rule. There will likely be appeals and additional challenges to the Final Rule.
Contact your CSG Law counsel for consultation regarding the Final Rule. CSG Law will continue to track and provide updates on the Final Rule and ongoing litigation involving the Final Rule. If you have any questions about taking steps relating to the Final Rule and/or responding to employee concerns, please feel free to reach out to your CSG Law attorney or the authors of this alert.
1 No. 3:24-cv-00986-E (N.D. Tex. Apr. 23, 2024)