Texas Federal Court Enjoins the FTC from Implementing and Enforcing the Noncompete Ban

Winstead’s Labor & Employment team previously reported that the FTC issued its final rule on the proposed noncompete ban and that a Dallas-based tax services company filed suit in Texas seeking a stay of the FTC’s rule. Back in May, Judge Ada Brown in the United States District Court for the Northern District of Texas set out a briefing schedule for Ryan LLC’s motion to stay the FTC’s final rule, wherein Judge Brown promised to render a decision on whether to stay the rule by July 3, 2024.

Judge Brown fulfilled her promise. On July 3, Judge Brown granted Ryan LLC’s motion and issued a memorandum opinion and preliminary injunction enjoining the FTC’s final rule as to the plaintiffs in the lawsuit until she can render a decision on the merits. No oral hearing was conducted on Ryan LLC’s motion.

In enjoining the FTC’s final rule, Judge Brown examined each of the elements necessary for the issuance of a preliminary injunction: (i) whether the plaintiffs would likely succeed on the merits; (ii) whether the plaintiffs would suffer irreparable harm without an injunction; and, (iii) whether the balance of the harms and the public interest weighed in favor of an injunction.

First, she found that—notwithstanding the FTC’s interpretation that noncompete clauses are unfair methods of competition under the FTC Act—the “text, structure, and history” of the applicable sections of the FTC Act “reveal that the FTC lacks substantive rulemaking authority with respect to unfair methods of competition[.]” She further found that the FTC had not sufficiently explained its reasoning for the final rule because 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.’” Second, Judge Brown stated that in the Fifth Circuit, “nonrecoverable costs of complying with a putatively invalid regulation typically constitute irreparable harm,” such that compliance with the final rule “would result in financial injury” to the plaintiffs. Lastly, she observed that noncompetes have long been “judicially recognized as lawful and beneficial to the public interest” and that “maintaining the status quo and preventing the substantial economic impact of the [final rule]” would not inflict “harm on the FTC.”

Accordingly, the FTC is temporarily prohibited from taking any action as to the plaintiffs in the lawsuit to implement or enforce its noncompete ban. Judge Brown anticipates that she will render a decision on the merits of the FTC’s final rule by August 30, 2024—a few days before the rule was originally set to go into effect. The FTC may appeal the preliminary injunction and, if necessary, any final decision on the merits to the United States Court of Appeals for the Fifth Circuit. As the FTC’s noncompete ban works its way through the federal appellate courts or further developments arise, Winstead’s Labor and Employment team will post updates and be available to provide advice to employers seeking guidance on how to proceed in the interim.

Contacts:

Taylor E. White
twhite@winstead.com I 214.745.5175