July 5, 2024–In a significant new development following the Federal Trade Commission’s (“FTC”) April 23, 2024, far-reaching final rule effectively banning all non-competition agreements, on July 3, 2024, the U.S. District Court for the Northern District of Texas in Ryan, LLC v. Federal Trade Commission issued a limited stay and preliminary injunction of the FTC’s non-compete final rule that would render almost all non-competition agreements, with very limited exceptions, unenforceable. For more in-depth discussion of the final rule, please see Kullman’s April 25, 2024, client bulletin. See The FTC Bans Non-Competition Agreements – Kullman (kullmanlaw.com)

The court’s July 3 decision to grant a stay and preliminary injunction of the non-compete final rule, pending further litigation in the Texas case, was based on two primary bases. First, the court found that while the FTC has some authority to promulgate rules to prohibit unfair methods of competition, the FTC lacks the substantive rulemaking authority under Section 6(g) of the FTC Act to promulgate the new non-compete final rule in the manner in which it does so, as Section 6(g) is a non-substantive “housekeeping statute.” Second, the court agreed with the plaintiff’s argument that the non-compete final rule appears to be arbitrary and capricious in violation of the requirements of the Administrative Procedure Act.

However, significant for those companies or entities who are not a party to the Ryan lawsuit, the court rejected the request for a nationwide injunction, by limiting the stay and preliminary injunction to enforcement of the non-compete final rule against the named and intervenor plaintiffs in the action. Therefore, for any employer that was not a plaintiff or plaintiff-intervenor in the action, the non-compete final rule is still set to take effect on September 4, 2024, although the court’s opinion clearly casts doubt on the long-term viability of the rule.

The Texas court has ordered the parties to submit a status report by July 9, 2024, to determine the next steps in the case and has indicated that it will decide on the merits of the case by August 30, 2024. In light of the September 4, 2024 notice obligations to employees currently subject to non-competition agreements, all employers should monitor these fast-moving developments (including the other cases filed around the country) and continue to evaluate the appropriate strategy with respect to the non-compete final rule’s notice requirement in the event the picture remains inconclusive as the September 4, 2024 notice deadline approaches. The Kullman attorney with whom you regularly and customarily work is available to discuss these important developments with you.