We previously wrote about the Federal Trade Commission’s (FTC) issuance of a rule banning non-compete clauses in employment. The FTC’s issuance of its final rule banning non-compete clauses constituted an unprecedented intrusion into matters of state law, which governed non-compete clauses. Nevertheless, it appears now that the FTC’s non-compete ban is beginning to unravel.

Last week, the United States District Court for the Northern District of Texas in Ryan LLC v. Federal Trade Commission, issued a preliminary injunction against the Federal Trade Commission’s rule banning non-compete clauses in employment. The preliminary injunction does not apply to all employers, but only to the parties in the case – Plaintiff Ryan LLC, and Plaintiff-Intervenors Chamber of Commerce of the United States of America; Business Roundtable; Texas Association of Business; and Longview Chamber of Commerce. Although business groups had hoped for a nationwide preliminary injunction, the court found that the plaintiffs did not sufficiently brief a justification for such broad injunctive relief. In any event, the court stated that it will rule on the ultimate merits of the non-compete ban by no later than August 30, 2024, in advance of the ban’s effective date of September 4, 2024. Based on the court’s opinion supporting its issuance of the preliminary injunction, the court will likely hold that the FTC’s non-compete ban is invalid.

Issuance of the Preliminary Injunction

In order to secure a preliminary injunction, a moving party must show that (i) it has a substantial likelihood of success on the merits; (ii) irreparable harm would result without the issuance of a preliminary injunction; and (iii) the balance of equities and public interest weigh in favor of issuing a preliminary injunction. The Texas court in Ryan LLC found that the plaintiffs satisfied each of these requirements.

Likelihood of Success on the Merits

The court found that the plaintiffs would likely succeed on the merits based on its determination that the FTC lacked authority to create “substantive” rules, despite its general authority to regulate “unfair methods of competition.” The court, on page 21, also found that the non-compete ban was arbitrary and capricious, “because it is unreasonably overbroad without a reasonable explanation. It imposes a one-size-fits-all approach with no end date. . . .” Consequently, the court reasoned that the first element of the preliminary injunction analysis, i.e., the plaintiffs’ ultimate likelihood of success on the merits, was satisfied.

Irreparable Harm

The court found that the plaintiffs adequately showed that the failure to issue a preliminary injunction would constitute irreparable harm. Citing appellate precedent, the court noted on page 26 that the “‘nonrecoverable’ costs of complying with a putatively invalid regulation typically constitutes irreparable harm.” The FTC failed to rebut the contention that aggrieved plaintiffs would have an opportunity to recover costs spent from complying with the ban if it later turned out that the ban was found to be invalid. Indeed, the FTC enjoys sovereign immunity for claims against monetary damages. As a result, the nonrecoverable costs of compliance would constitute irreparable harm under the circumstances.

Balance of Equities and Public Interest

According to the court, the plaintiffs and public interest would suffer injury if the preliminary injunctive relief were not granted. Maintenance of the status quo would prevent the ban’s negative economic impact, while inflicting no harm on the FTC.

Individual vs. Nationwide Preliminary Injunction

Although the court found in favor of issuing a preliminary injunction prohibiting the enforcement of the non-compete ban to the plaintiffs in the case, it refused to grant a nationwide ban that would have stayed the rule’s application to all businesses. The court stated on page 31 that “Plaintiffs have offered virtually no briefing (or basis) that would support ‘universal’ or ‘nationwide’ injunctive relief.” As far as the court was concerned, nationwide injunctive relief was not necessary to provide plaintiffs with the complete relief sought.

What Does this Mean?

Based on the Texas court’s decision in Ryan LLC v. FTC, it is likely that the court will ultimately rule that the non-compete ban rule is invalid. The court announced that its ultimate decision will come before the rule is scheduled to go into effect. In the meantime, there is another case pending in a Pennsylvania federal court, ATS Tree Services LLC v, Federal Trade Commission, in which the plaintiff has sought a preliminary injunction against the non-compete ban rule. Oral argument is scheduled for July 10, 2024, and it is possible that this case could result in a nationwide preliminary injunction or an invalidation of the non-compete ban before the court in Texas issues its merits-based decision.

Although not addressed in the Texas court’s opinion, the United States Supreme Court’s very recent June 28th decisions in Loper Bright v. Raimondo and Relentless v. Department of Commerce, might affect a court’s decision on whether to enforce the FTC non-compete ban. The Supreme Court in Loper Bright overruled the longstanding “Chevron” rule, which required a court to defer to a federal agency’s administrative agency rulemaking authority. Based on the Supreme Court’s decision, a court may but is not required to defer to the FTC’s rulemaking authority. Instead, under the new standard, “Courts must exercise their independent judgment in deciding whether an agency has acted within its statutory authority as the [Administrative Procedure Act] requires.”

What Comes Next?

We will continue to monitor these developments, although so far it looks as if the FTC’s non-compete ban will not survive in its current form.

In the meantime, please contact Salvatore Gangemi at sgangemi@murthalaw.com or at 203.653.5436 if you have any questions.