FTC Non-Competition Final Rule Update

On July 3, 2024, a Texas federal Northern District Court granted a preliminary injunction to the Plaintiff and the four Intervening Plaintiffs in the matter of Ryan v. Federal Trade Commission. The preliminary injunction enjoins the Federal Trade Commission’s (“FTC”) Final Rule prohibiting non-competition agreements from being implemented and enforced as to the Plaintiff and Intervening Plaintiffs only. In addition, the Court enjoined the effective date of the Final Rule, again limiting the injunction to the Plaintiff and Intervening Plaintiffs only.

The Court declined to enter a universal injunction or to extend the injunction to members of the Plaintiff-Intervenors’ business associations. The Court noted that it intends to resolve the case on the merits, presumably including the scope of relief, by August 30, 2024. In addition, there is another case pending in the Eastern District of Pennsylvania, and the case there is on a fast track, as well.

Given the current Texas injunction is limited in nature, it leaves employers in limbo on whether the Final Rule prohibiting all non-competition agreements between employers and workers will go into effect on September 4, 2024. However, the legal process is far from over.

The parties could appeal the ruling limiting the application of the injunction or even go to the United States Supreme Court.

In addition, although the Ryan Court issued a limited preliminary injunction only as to those parties before the Court, the Fifth Circuit appellate court precedent is clear that relief for unlawful agency rules under the Administrative Procedure Act (“APA”) is “vacatur,” which invalidates the rule in all its applications, no matter the party. Thus, if litigation proceeds to the appellate stages, and the courts agree that the Rule is unlawful, the courts should vacate the Final Rule so that it cannot be applied to anyone.

As such, the Texas preliminary injunction remains in effect until the Court rules on the merits — which it intends to do by August 30, 2024. The FTC is likely to appeal. A ruling in the Pennsylvania matter is expected before July 23, 2024. Regardless of how the Pennsylvania Court rules, the losing party likely will appeal to the Third Circuit. At that point, both the Fifth and Third Circuits are likely to hear appeals on a similar timeline, with a possible subsequent Supreme Court review.

We will continue to provide updates for our clients as they unfold. In the meantime, employers may want to maintain the status quo with the execution and implementation of non-competition agreements for their businesses.