Employment Law Report
Texas Court Issues Limited Preliminary Injunction on Non-Compete Ban
A federal judge issued a limited preliminary injunction against the Federal Trade Commission’s (“FTC”) ban on non-compete agreements. The new rule banning non-competes was set to take effect in September.
The FTC issued the final Non-Compete Rule in April and it was scheduled to take effect on September 4, 2024. The rule would ban new non-compete agreements with all workers, with some exceptions. Current non-compete agreements for “senior executives” would be grandfathered in under the rule. A senior executive is defined in the rule as a person in a policy making position who makes more than $151,164 a year.
In the first decision on the FTC Non-Compete Rule, Judge Ada Brown in Ryan LLC v. Federal Trade Commission, issued a limited preliminary injunction in federal court on July 3, 2024, in the Northern District of Texas, that preliminarily enjoins enforcement of the rule against the Plaintiff, Ryan LLC, until a final ruling on the merits. Judge Brown, however, declined to issue a nationwide injunction, meaning that the ruling only blocks the rule for parties in the case Ryan LLC v. Federal Trade Commission. The U.S. Chamber of Commerce has joined as a party in that case against the FTC.
Judge Brown’s opinion states the Plaintiff had demonstrated a substantial likelihood of success on the merits about the FTC lacking the authority to ban non-compete agreements based on the Federal Trade Commission Act of 1914. Traditionally, non-competes have been regulated at the state level. The FTC had argued that the new rule banning the practice was permissible because of its authority to regulate “unfair methods of competition.” Judge Brown disagreed, stating that the new rule exceeds the FTC’s authority and constitutes an arbitrary and capricious approach to the issue. The judge also stated that she will issue a final ruling on the merits before the end of August – and before the date the Non-Compete Rule is set to take effect. There are also several other lawsuits challenging the rule. The FTC has estimated about 30 million contracts would be invalid under the new rule.
Employers should stay informed of the status of the rule and prepare in advance if the rule becomes effective on September 4. Employers are wise, in the meantime, to review whether: senior executives have or should have non-compete contracts that could be grandfathered in before September 4; narrowly tailored non-solicitation agreements could accomplish the same legitimate business interests as non-compete agreements without violating the rule; and supervisory employees should have narrowly tailored nondisclosure agreements. If the rule becomes effective on September 4, employers will need to provide notice as well. If the rule does not become effective on September 4, then employers are wise to still review whether their non-competition, non-solicitation, and confidentiality agreements are up to date and in compliance with the law. If your business needs assistance examining these options, or has questions about the rule’s impact on current and future non-compete agreements, please consult your Wyatt, Tarrant & Combs labor and employment counsel.
