Federal Court in Texas Grants Limited Injunction of Federal Trade Commission (FTC) Non-Compete Rule-Promises Final Decision by August 30

Federal Court in Texas Grants Limited Injunction of Federal Trade Commission (FTC) Non-Compete Rule-Promises Final Decision by August 30

As PSE reported in our May 3 Article, “New FTC Rule Banning Non-Compete Agreements Challenged by the U.S. Chamber of Commerce,” a new Rule banning most non-compete agreements is set to take effect on September 4, 2024. However, a Federal District Court for the Northern District of Texas has granted a limited preliminary injunction preventing the Rule from taking effect until the Court may issue a final decision. The ruling applies only to the Plaintiffs in the current lawsuit, which include the U.S. Chamber of Commerce and others. As we reported, the U.S. Chamber originally filed its suit in the Eastern District of Texas, and that case was stayed because another set of Plaintiffs filed their action against the FTC Rule before the Chamber’s suit. The Chamber then filed a motion to intervene in the Northern District action, which was granted.

In granting the preliminary injunction, the Court held that the Plaintiffs had a substantial likelihood of succeeding on the merits, that to allow the Non-Compete Rule to take effect would result in irreparable harm, and that the public interest was served by granting the preliminary injunction.

The Court analyzed whether the FTC acted within its congressional grant of statutory authority under the Administrative Procedures Act (APA). It concluded that the Plaintiffs “are likely to succeed on the merits that the FTC lacks statutory authority to promulgate the Non-Compete Rule.” The Court also concluded that “the Rule is arbitrary and capricious” because it is unreasonably overbroad without a reasonable explanation. It imposes a one-size-fits-all approach with no end date, which fails to establish a “rational connection between the facts found and the choice made.” According to the Court, the FTC relied upon “a handful of studies” in promulgating the Rule, which demonstrated a “lack of evidence,” along with the FTC’s failure to provide any evidence that it considered any “less disruptive alternatives” to imposing a near-total nationwide ban on non-compete agreements.

While it is unlikely that the Rule will be upheld, the Court has promised to issue a final decision by August 30, 2024. With the Rule set to take effect on September 4, 2024, we recommend that clients continue to review our updates and recent developments, which will guide them if the FTC Rule is upheld.

Please get in touch with Kristina Curry at kcurry@pselaw.com or call 937.223.1130 with any questions regarding this rapidly changing landscape of administrative rulemaking as it applies to your business.