FTC Appeals Federal District Court Ruling Blocking Noncompete Ban

On Oct. 18, 2024, the Federal Trade Commission (FTC) filed a notice of appeal challenging the U.S. District Court for the Northern District of Texas’ order in Ryan LLC v. FTC that blocked the commission’s noncomplete ban for all employers and prevented the ban from taking effect on Sept. 4, 2024. The U.S. Court of Appeals for the 5th Circuit will hear the appeal.

Background

On May 7, 2024, the FTC published a final rule prohibiting employers from entering into or enforcing noncompete clauses with most employees. Subject to limited exceptions, the final rule provided that:

• The use of noncompete clauses would be banned as of the effective date;
• Any existing noncompete clauses (other than those entered into with senior executives) would be invalidated; and
• Employers would have to notify all employees (other than senior executives whose existing noncompete agreements would remain enforceable) that their existing noncompete agreements would not be

State and local legislatures and courts continue to determine the enforceability of noncompete clauses. The FTC rule would have governed the enforceability of noncompete clauses at the federal level and superseded any less restrictive state laws or judicial interpretations.

Court Cases

In Ryan, the plaintiffs argued that the noncompete ban should be vacated because it exceeds the FTC’s statutory authority, is unconstitutional, and is the product of arbitrary and capricious decision-making. In a preliminary holding on July 3, 2024, the U.S. District Court for the Northern District of Texas partially blocked the ban, but only for plaintiffs (not nationwide), while it considered the merits of the case. On Aug. 20, 2024, the court in Ryan issued a final ruling in Ryan agreeing with the plaintiffs’ arguments and holding that “the FTC lacks statutory authority to promulgate” the noncompete ban and the ban “is arbitrary and capricious.” Under the court’s ruling, the noncompete ban is permanently blocked for all employers.

Impact on TechServe Members

The Texas court’s ruling blocking the FTC’s noncompete ban remains in effect during the 5th Circuit appeals process. Consequently, employers who use non-competes do not need to take immediate steps to change company practices to comply with the FTC rule; state and local laws continue to apply.

TechServe members generally do not use non-competes but instead use other restrictive covenants to protect proprietary information and prevent solicitation of the former employers’ clients or the recruitment of the former employer’s workers. Employers should continue to ensure they are using best practices in these areas, as discussed in TechServe’s recent webinar. TechServe will continue to monitor the Ryan litigation and keep members informed of any developments.

Highlights

• On May 7, 2024, the FTC issued a final rule that would ban virtually all noncompetes effective 4, 2024.
• On July 3, 2024, the U.S. District Court for the Northern District of Texas put the FTC noncompete ban on hold, but only for the plaintiffs.
• On 20, 2024, the District Court blocked the FTC’s noncompete ban for all employers.
• On 18, 2024, the FTC appealed the District Court’s order blocking the noncompete ban to the U.S. Court of Appeals for the 5th Circuit.
• Another Federal Court in Pennsylvania sided with the FTC; pending the outcome of the Texas case, the matter may ultimately be decided by the Supreme Court.