FTC Appeals Texas Ruling on Noncompete Agreement Ban

The Federal Trade Commission (FTC) announced on October 18, 2024, that it would seek intervention from the Fifth Circuit Court of Appeals in response to a Texas federal judge’s recent decision that effectively nullified the agency’s nationwide ban on employment noncompete agreements. The FTC’s notice of appeal challenges an August ruling from the U.S. District Court for the Northern District of Texas in the case of Ryan LLC v. Federal Trade Commission, which declared the FTC’s ban invalid.

In the ruling, Judge Ada Brown determined that the FTC exceeded its statutory authority in implementing the noncompete ban, characterizing the rule as “arbitrary and capricious.” The August decision built upon a prior preliminary injunction that Judge Brown issued, further asserting that the rule should be set aside with nationwide effect, as noted by Law360.

The FTC’s noncompete ban, which was finalized in April 2023 with a contentious 3-2 vote, aimed to prohibit nearly all noncompete agreements between employers and employees. Had it taken effect as scheduled on September 4, 2024, the rule would have required employers to cease enforcing existing noncompete agreements and notify employees that such agreements would no longer be valid.

According to Law360, the FTC’s appeal comes on the heels of another legal setback when the agency appealed a similar preliminary injunction ruling from the U.S. District Court for the Middle District of Florida in Properties of the Villages, Inc. v. Federal Trade Commission. In that case, the court indicated that the FTC’s rule might lack proper congressional authorization under the “major questions doctrine,” a legal principle that demands agencies provide clear evidence of legislative backing for rules of significant economic and political impact.

The FTC’s recent efforts to assert its authority over noncompete agreements were also met with resistance in Pennsylvania. A local company, ATS Tree Services, LLC, recently dropped its challenge against a ruling denying a preliminary injunction from the U.S. District Court for the Eastern District of Pennsylvania. In that case, the judge concluded that the FTC acted within its rights under the FTC Act when it classified all noncompete clauses as “unfair methods of competition.” The judge also dismissed claims from ATS Tree Services that the new rule would cause them irreparable harm, particularly regarding investments in employee training.

As it stands, the noncompete ban remains enjoined under the recent ruling in the Ryan case. The Fifth Circuit is now set to review the matter, and opponents of the FTC’s rule perceive this court as potentially more sympathetic to their arguments. Legal experts suggest that the case may eventually reach the Supreme Court, though many anticipate that the FTC’s noncompete rule is unlikely to prevail in the long run.

In the interim, employers are advised to concentrate on state law compliance and ensure that any restrictive covenants are narrowly tailored to protect legitimate business interests. As scrutiny of noncompete agreements intensifies among state and federal lawmakers, organizations may need to adapt their practices to align with evolving legal standards.

Source: Law360