FTC Appeals Federal District Court Decision Blocking Noncompete Ban

On Oct. 18, 2024, the Federal Trade Commission (FTC) filed a notice of appeal contesting 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 stopped 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 enforced.

Currently, the enforceability of noncompete clauses is determined by state and local legislatures and courts. The FTC rule would have governed the enforceability of noncompete clauses at the federal level and superseded any less restrictive state laws or judicial interpretations.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 Case

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 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.

Current Impact

The Texas court’s ruling blocking the FTC’s noncompete ban remains in effect as the FTC appeals the decision to the 5th Circuit. Consequently, employers do not need to take steps in the immediate term to invalidate existing noncompetes, update agreements or issue notices. Employers may also continue to rely on state-level guidance regarding the enforceability of noncompetes. However, in light of the FTC’s appeal, employers should continue to monitor this case for updates because the ban, if implemented, would prohibit nearly all noncompete agreements nationwide.

Highlights

• On May 7, 2024, the FTC issued a final rule that would ban virtually all noncompetes effective Sept. 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 Aug. 20, 2024, the District Court blocked the FTC’s noncompete ban for all employers.
• On Oct. 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.