Texas Court Imposes Injunction Against FTC in Case Challenging FTC’s Non-Compete Ban

Our blog of April 24 reported on the finalization by the Federal Trade Commission (FTC) of a rule generally barring post-employment non-compete provisions in employment arrangements. The rule is scheduled to be effective September 4.  At the time of our blog, at least two cases had been filed challenging the FTC’s authority to issue the rule.

The first decision in these cases came down July 3 and is against the FTC.  In Ryan, LLC v. FTC a federal district court judge in Texas issued a preliminary injunction barring the FTC from enforcing the rule. The core finding behind the injunction appears to be the court’s conclusion that the FTC lacked the statutory authority to issue a rule barring non-compete agreements on a national basis and that the “Plaintiffs are likely to succeed on the merits that the [non-compete rule] is invalid.”

While the decision is obviously a very favorable development from the viewpoint of those objecting to the rule, there are several important aspects of the decision that need to be kept in mind. First, the ruling was a preliminary injunction, the court indicating that it would enter a ruling on the merits on or before August 30. Even more importantly, while the plaintiffs requested that the court enter into a nationwide injunction, the court limited its injunction to the parties in the case. So, unless the court broadens the scope of its injunction, other employers will not benefit directly from the case. Ryan is, however, not the only case challenging the FTC rule, and, in fact, a hearing is currently scheduled for July 10 in ATS Tree Services, LLC v. FTC, another court case (this time in the Eastern District of Pennsylvania), challenging the rule on a nationwide basis.

While the Ryan decision is far from the end of the story, it certainly suggests to us that employers considering changes in their practices be cautious in what they implement today. Stated differently, in deciding whether they want to make a change today, an employer should consider whether it would still want to have made that change if the rule is eventually stricken.