FTC’s ban on noncompete agreements halted … sort of

Close up of a non-compete clause agreement with a gavel and "BANNED" stamped on agreement, with an eraser erasing the word "BANNED"

Earlier this spring, in an article titled “FTC announces nationwide ban on noncompetes in the workplace,” we alerted employers to the Federal Trade Commission’s approval of a final rule implementing a nationwide ban on noncompete clauses in new employment agreements. The rule goes one step further and requires employers to inform current and former employees that existing agreements will no longer be enforceable. Current noncompete agreements with senior executives are exceptions to the new FTC rule. Now, a July 3rd order by the U.S. District Court for the Northern District of Texas calls into question whether the noncompete ban goes into effect nationwide as scheduled on September 4, 2024.

The Texas lawsuit

In April, Ryan LLC, a global tax preparation service and software provider, the U. S. Chamber of Commerce, and other employer groups filed a lawsuit in Dallas federal court challenging the FTC’s noncompete rule. Last week, on July 3, the court issued an order staying the enforceability of the rule only as to Ryan LLC and the other named plaintiffs. No other employers nationwide were covered by the stay.  Interestingly, the court said it intended to rule on the “ultimate merits” of the challenge to the FTC’s noncompete ban on or before August 30, 2024 — that’s just five days before the rule goes into effect.

What happens next?

A number of future developments in the Texas lawsuit could determine whether the FTC noncompete ban goes into effect on a nationwide basis. First, the parties could appeal the July 3rd ruling, with the FTC seeking to set aside the stay and the plaintiffs seeking to expand the stay’s breadth and applicability. Second, the court’s next ruling on or before August 30 could spell out whether the noncompete rule will be enforced nationally.

Keep in mind the Texas lawsuit is not the only game in town. ATS Tree Services, LLC filed a similar challenge to the FTC rule with the U.S. District Court for the Eastern District of Pennsylvania seeking to enjoin the noncompete ban. In the Pennsylvania action, a hearing is scheduled for this Wednesday, with a ruling expected on or before July 23, 2024.

At McAfee & Taft, we’re monitoring these fast-moving events and will continue to keep you advised on where the enforceability of noncompete agreements stand.