In a significant legal development, a Texas federal judge has issued a preliminary injunction against the Federal Trade Commission's (FTC) rule that bans noncompete agreements. This ruling is in response to a challenge by tax preparation company Ryan LLC and the U.S. Chamber of Commerce. The court's decision puts a temporary hold on the rule as applied to these Plaintiffs, which was set to take effect in September, pending a review of the FTC's authority to enforce such a sweeping prohibition.
While it is not yet a nationwide injunction, it's clear that the rule itself is in jeopardy of being struck down entirely when the judge issues a decision on the merits of the case by late August 2024.
In U.S. District Judge Ada Brown's order, she indicates that the FTC may not have the substantive rulemaking authority to implement the noncompete ban. The judge's opinion suggests that the FTC Act does not grant the commission the power to enforce unfair methods of competition in this manner. Given the Supreme Court's decision on Monday striking down the Chevron doctrine — where courts often defer to the expertise of administrative agencies — this Texas decision is hardly a surprise.
Judge Brown's ruling reflects this shift, emphasizing that the FTC's rulemaking should be explicitly authorized by Congress and that the noncompete ban is likely too broad without a solid rationale.
Although you can never say never, reading the Judge's decision, it seems extremely likely that the FTC rule is not going to survive the ultimate legal challenge, at least for now. As a result, employers should not waste significant time in modifying existing non-compete agreements to comply with the potential rule. Rather, employers should focus their energies on state law developments that may ban certain agreements because it is likely that those bans will remain in place.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
