- What is the current impact? A federal judge’s July 3 decision only impacts the employers that served as the plaintiffs in the case before the court.
- What is the wider possibility? The Texas court judge says she will decide the ultimate fate of the FTC final rule on or before August 30.
- Are state laws against noncompetes in place? Four states currently have laws against noncompetes. Many other states have laws that limit aspects of their usage.
A federal judge on Wednesday, July 3, preliminarily delayed a ban on noncompete agreements from taking effect. The decision, for right now, only impacts the employers that served as the plaintiffs in the case before the court. However, the ruling may signal a looming broader block on the Federal Trade Commission’s recent final rule.
The July 3 order in the U.S. District Court for the Northern District of Texas limits the preliminary injunction to the primary plaintiff, Ryan LLC, and the plaintiffs-intervenors, which include the U.S. Chamber of Commerce, the Business Roundtable, the Texas Association of Business and the Longview Chamber of Commerce. To clarify, for the plaintiffs-intervenors, this applies to the entities themselves as employers and does not apply directly to their members.
The final rule at the center of the court case was issued by the Federal Trade Commission (FTC) on April 23 and stipulates a national effective date of Wednesday, Sept. 4. Given that impending deadline, Judge Ada Brown, who presided over the Texas case, said she expects to issue a final decision on the fate of the FTC rule by the end of August.
“While this order is preliminary, the court intends to rule on the ultimate merits of this action on or before August 30, 2024,” Judge Brown wrote in her decision.
What Happens Next?
If the judge decides against issuing a broader ruling, the ban on noncompete agreements will go into effect for the majority of companies in the U.S. If she determines a broader blockage is appropriate, the ruling would likely scuttle the FTC-led prohibition of noncompetes at the national level.
What are the odds of full blockage? Pretty high, given the central nature in the Texas case of Section 6 of the Federal Trade Commission Act. Section 6, and specifically 6(g), grants the FTC “additional powers to support the adjudicatory scheme.”
“This language [within Section 6] means what it says: The FTC can issue legislative rules — meaning rules that have the force of law — to prevent unfair methods of competition,” the FTC said in an official statement. “Proceeding by rulemaking rather than case-by-case enforcement is a much more efficient way to address noncompetes.”
However, in her 36-page ruling, Judge Brown wrote, “Congress must have ‘understood rules issued under Section 6 to include legislative rules prohibiting unfair methods of competition.’ ... Again, the Court rejects such reasoning as a piecemeal attempt to confer rulemaking authority that Congress has not affirmatively granted to the FTC. The role of an administrative agency is to do as told by Congress, not to do what the agency think it should do.”
Brown later added, “The court concludes the text and the structure of the FTC Act reveal the FTC lacks substantive rulemaking authority with respect to unfair methods of competition, under Section 6(g). ... Thus, when considering the text, Section 6(g) specifically, the court concludes the commission has exceeded its statutory authority in promulgating the [noncompete rule].”
Any subsequent ruling by Judge Brown would not affect laws at the state level. Four states — California, Minnesota, Oklahoma and North Dakota — currently have laws that ban noncompete agreements. Thirty-four additional states plus Washington, D.C., have various laws that limit aspects of their usage (e.g., salary thresholds, job classifications, covenant duration). Twelve states currently do not have any restrictions on noncompetes.
Commentary on the July 3 Ruling
Participants and observers of the Texas court case weighed in on the July 3 initial decision.
“This ruling is a big win in the Chamber’s fight against government micromanagement of business decisions,” Daryl Joseffer, the executive vice president and chief counsel of the U.S. Chamber of Commerce Litigation Center, stated in a press release. “The FTC’s blanket ban on noncompetes is an unlawful power grab that defies the agency’s constitutional and statutory authority and sets a dangerous precedent where the government knows better than the markets. The U.S. Chamber will continue to hold the FTC accountable in court.”
FTC spokesperson Douglas Farrar stated on social media platform X, “The FTC stands by our clear authority, supported by statute and precedent, to issue this rule. We will keep fighting to free hardworking Americans from unlawful noncompetes, which reduce innovation, inhibit economic growth, trap workers and undermine Americans’ economic liberty.”
Law firm Ogletree Deakins stated in a blog post, “Although the decision in Ryan did not result in a nationwide injunction, it likely signals that the FTC’s noncompete rule will not survive judicial scrutiny. Absent an interlocutory appeal or a substantial change in the court’s reasoning, it appears the Ryan court is poised to strike down the rule prior to its scheduled effective date.” In summation, it said the FTC rule is “on life support, at best.”
Regardless of the final outcome, the law firm advised employers to examine their current restrictive covenants (in particular, their noncompetes) and limit actual usage to what is actually needed to protect legitimate business interests (i.e., confidential information, trade secrets, unfair competition).
The Basis of Noncompete Agreements
Companies have traditionally used noncompete agreements to prevent employees from sharing confidential company information (e.g., trade secrets, proprietary processes, product development pathways) with outside entities (including future employers) during or after employment. Many of these contracts also specify a certain length of time (e.g., three years) when the employee is barred from working for a competitor after leaving the employer.
Prior to the April 23 final rule, the FTC and the Government Accountability Office (GAO) stated such agreements are overapplied and can impede job mobility, job growth, wages and new business creation.
In filing its lawsuit against the FTC, the U.S. Chamber of Commerce stated, “Noncompete agreements can serve vital procompetitive business and individual interests — like protecting investments in research and development, promoting workforce training and reducing free-riding — that cannot be adequately protected through other mechanisms such as trade-secret suits or nondisclosure agreements.”
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