Ryan LLC v. FTC: Texas Court Blocks the FTC’s Non-Compete Ban Nationwide

On August 20, 2024, in Ryan LLC v. Federal Trade Commission, Case No. 3:24-CV-00986-E, U.S. District Court Judge Ada E. Brown issued a nationwide Order setting aside the FTC’s rule banning non-competes.

As Strowhiro Law previously wrote, the FTC’s non-compete rule was set to take effect on September 4, 2024. Now, given this Order, the non-compete rule will not take effect as scheduled and it’s fate is murky.

The FTC’s Non-Compete Rule was “Set Aside.” What does this mean for employers and EMployees?

Bottom line: for now, the FTC’s non-compete ban effectively does not exist (unless the the Ryan LLC Order is later reversed on appeal). Therefore,

• Non-competes that are enforceable absent the FTC’s rule can remain in effect and continue to be enforced;

• Employers and employees can continue to enter into non-competes, subject to the general rule of reasonableness and applicable state and local laws that may further restrict such agreements; and

• The FTC’s non-compete rule had required employers to send notices to their employees by September 4, telling them that their non-competes are no longer enforceable, but such notice is no longer necessary.

Who does this order apply to?

The Order blocking the FTC’s non-compete ban now applies to everyone.

In early July 2024, the Ryan LLC Texas District Court granted a preliminary injunction blocking enforcement of the FTC’s non-compete rule as to the named plaintiff (Ryan, LLC) & plaintiff-intervenors only. This meant that the non-compete ban would not be enforceable as to Ryan, LLC and a few other entities directly involved in the case, but that the ban was still set to take effect for the vast majority of U.S. employers on September 4.

The August 20 Order expanded on the July ruling, blocking the FTC’s non-compete rule nationwide for all — not just for the plaintiff and intervenors in the suit. Relying on recent Fifth Circuit precedent, Texas District Court Judge Ada Brown concluded that the proper remedy is to block the FTC’s noncompete ban from taking effect nationwide — not just for the litigants in this case, but for all.

“Having concluded that (i) the FTC promulgated the Non-Compete Rule in excess of its statutory authority, and (ii) the Rule is arbitrary and capricious, the Court must ‘hold unlawful’ and ‘set aside’ the FTC's Rule…”

Why did the court set aside the FTC’s non-compete rule?

The Court set aside the non-compete rule by concluding that (1) the FTC lacks statutory authority to promulgate this type of substantive rulemaking under Section 6(g) of the FTC Act and (2) the non-compete rule was arbitrary and capricious under the APA standard.

Regarding the latter, and similar to SCOTUS’s reasoning in striking down the DOL’s vax-or-test rule just a few years ago, the Texas District Court held that the FTC’s rule was unreasonably overbroad and lacked a reasonable explanation. The Court criticized the rule, calling it a “one-size-fits-all approach with no end date” that rejects a more targeted approach to address harmful non-competes only. The Court also stated that the FTC should have considered alternatives or exceptions that could achieve the same ends, but failed to demonstrate that it did so.

So What’s Next? will non-competes ever be banned?

The FTC is “seriously considering” an appeal to Judge Brown’s ruling, according to the New York Times. If the FTC appeals, the Fifth Circuit (and potentially SCOTUS) would consider whether this Order should be overturned.

While it is possible that an appeal could result in the reinstatement or partial reinstatement of the FTC’s rule, it may not be likely. Two years ago, SCOTUS voted 6-3 to stop OSHA from enforcing its vax-or-test Emergency Temporary Standard (ETS) that would have required large employers to require masking and weekly COVID-19 testing of unvaccinated employees, on the general premise that the ETS was overbroad. (For example, the rule applied the same requirements to all large employers, regardless of industry, rather than taking into account particular dangers or heightened risks that may exist in certain environments such as manufacturing or healthcare.) This was following an appeal from the Fifth Circuit’s injunction that halted the ETS initially. Therefore, if the FTC appeals — which is not yet certain — it has an uphill battle, particularly given the appellate landscape.

That said, even if the FTC’s non-compete ban is not reinstated, don’t expect that non-competes are safe, either. As we have seen over the last several years, states have continued to restrict non-compete and non-solicitation agreements by passing laws that impose heightened standards to enter into or enforce these restrictions (such as salary minimums or limiting the restrictions to certain roles), limit the use of these restrictions with certain professions (such as physicians), or outlaw these restrictions altogether. Moreover, courts across the country have continued to look at non-competes with a more scrutinizing eye, narrowing or striking non-competes that are deemed overly broad in both the employment and M&A contexts. Companies that continue to protect their business interests via non-competes will need to stay up to date on legal developments that may impact their agreements’ enforceability. Meanwhile, all companies should consider diversifying and strengthening protections to company assets through other means, as well, including non-solicitation provisions, confidentiality and trade secrets protections, computer fraud and abuse policy protections, and IT and other security measures.