On May 7, 2024, the Federal Trade Commission (FTC) issued a final rule prohibiting most non-competition provisions in employment agreements. The rule immediately was challenged in the United States District Court for the Northern District of Texas by Ryan, LLC and a group of business organizations led by the Chamber of Commerce of the United States. On Wednesday, July 3, 2024, the Northern District of Texas issued a preliminary injunction enjoining (i.e., precluding) the FTC from implementing or enforcing the non-compete rule against the parties to the case pending a final ruling that the Court said it would issue by on or before August 30, 2024.

Although the preliminary injunction technically only enjoins the FTC from implementing or enforcing the non-compete rule against the parties to the case, it calls into question implementation of the rule nationwide. The first factor that a court must consider with respect to the issuance of a preliminary injunction is the likelihood that the party or parties seeking the injunction will be successful on the merits. The FTC’s claimed authority for issuance of the non-compete rule is Section 5 of the FTC Act, which prohibits “unfair or deceptive practices in or affecting commerce.” The Court said in its 33-page preliminary injunction opinion that the FTC did not have statutory authority to make substantive rules pursuant to Section 5 of the FTC Act and, even if the FTC did have such authority, the broad scope of the non-compete rule was arbitrary and capricious, a violation of the Administrative Procedure Act.

In the Supreme Court’s term that just concluded, the Court issued several significant decisions limiting administrative agencies. It is likely that the challenge to the FTC non-compete rule ultimately will end up in the Supreme Court and given the Court’s recent administrative law decisions, I expect that the FTC’s non-compete rule will be struck down.

Even if the FTC’s non-compete rule is struck down, the use of non-competition provisions in employment agreement will continue to face limits, both from courts and legislatures. This is a complex and developing area of the law for which RKW lawyers can provide advice and guidance. Please don’t hesitate to reach out to any of our employment lawyers if you have questions about the enforceability of your restrictive covenants.

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