ATTENTION CALIFORNIA EMPLOYERS: FTC FINAL RULE BANNING NON-COMPETES PUT ON HOLD BY TEXAS FEDERAL DISTRICT COURT

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As we discussed on April 24, 2024 HERE and April 26, 2024 HERE, the Federal Trade Commission (“FTC”) approved a Final Rule banning most non-competition agreements with workers nationwide. The Final Rule was immediately challenged in several federal district courts.

On July 3, 2024, a Texas federal court issued a preliminary injunction that temporarily blocks the FTC from enforcing the Final Rule banning non-compete agreements against the Plaintiffs in the lawsuit challenging the Final Rule brought by Ryan LLC (“Ryan”) and the U.S. Chamber of Commerce. Judge Brown did not grant the Plaintiffs’ request to extend the preliminary injunction nationwide, therefore, at this time the Court’s ruling only precludes the FTC from enforcing the Final Rule against the Plaintiffs in the Ryan lawsuit. Judge Brown is not scheduled to issue a final ruling on the merits until late August. However, the language of the opinion granting the preliminary injunction suggests that it is likely that the Final Rule will be struck down as an overreach of the Federal Trade Commission’s authority under the FTC Act. 

Ryan brought suit on April 23, 3024, the same day the FTC issued the Final Rule. Ryan generally alleged that the FTC lacked the statutory authority to issue the Final Rule, the Final Rule was an unconstitutional exercise of power, and the FTC’s acts, findings, and conclusions were arbitrary and capricious. On May 1, 2024, Ryan filed a motion seeking a stay of the September 4, 2024 effective date and a preliminary injunction. On May 8, the U.S. Chamber of Commerce successfully moved to intervene in the Ryan case, which was filed first.

In granting a preliminary injunction, the Court held that the Plaintiffs had met their burden that they were likely to ultimately succeed on the merits, irreparable harm would result absent injunctive relief, and the balance of harms and the public interest weighed in favor or granting injunctive relief. According to Judge Brown’s July 3, 2024 opinion, “the text, structure, and history of the FTC Act reveal that the FTC lacks substantive rulemaking authority with respect to unfair methods of competition under Section 6(g).” The Court acknowledged that Section 5 of the FTC Act vested the FTC with broad discretion to prevent the use of “unfair methods of competition in or affecting commerce and unfair or deceptive acts or practices in or affecting commerce.” The Court further observed that Section 6 gives the FTC power “to make rules and regulations for the purpose of carrying out the provisions of this subchapter.” However, after conceding that “the FTC has some authority to promulgate rules to preclude unfair methods of competition,” the Court sided with Plaintiff’s claim that the FTC’s rulemaking authority does not encompass “substantive” rulemaking but rather only “procedural” rulemaking.

We will continue to follow this case and provide updates. Please note that regardless of the outcome of this case and the enforceability of The Final Rule, employers must comply with existing state laws governing non-competition agreements.  


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