On Wednesday, July 3, 2024, a federal judge in Texas issued an injunction which blocked the Federal Trade Commission’s (“FTC”) rule set to take effect September 4, 2024 banning non-compete agreements, but limited the injunction to the Plaintiffs in the case and did not issue a nation-wide ban as expected. However, the judge’s opinion assures that she will issue a final decision on the merits of the FTC non-compete ban by August 30, 2024, days before FTC rule is set to take effect.
What This Means to Your Business
In its 33 page opinion, the Court held: “The Court concludes Plaintiffs are likely to succeed on the merits that the FTC lacks statutory authority to promulgate the Non-Compete Rule, and that the Rule is arbitrary and capricious.” Accordingly, there is good cause to believe that the Texas court will ultimately strike down the FTC ban when it issues its decision on the merits on August 30. However, we have previously identified in our April 24 and May 7 client alerts steps companies can be taking now to prepare themselves should the non-compete ban go into effect. Because of the proliferation of new state statutes and court decisions regarding non-competition agreements, this remains an important time to update existing agreements and review and strengthen IP protection and trade secret/confidentiality practices.
Discussion
As we covered in the last client alert following the publication of the Final Rule in the Federal Register, the Effective Date for the Final Rule was set for September 4, 2024.
As many anticipated, the Federal Trade Commission’s final rule banning non-compete agreements (“Final Rule”) announced on April 23, 2024 immediately triggered lawsuits, challenging the agency’s authority to issue such a sweeping and consequential rule affecting businesses and employees everywhere. The first lawsuit, initiated by Ryan, LLC, a global tax services, software, and technology firm, was filed just hours after the Final Rule was announced. See Ryan v. FTC, No. 3:24-cv-00986 (N.D. Tex. Apr. 23, 2024) (“Ryan Litigation”). Another lawsuit, filed by the Chamber of Commerce of the United States of America, Business Roundtable, Texas Association of Business, and Longview Chamber of Commerce, was brought the very next day. See Chamber of Commerce v. FTC, No. 24-cv-00148 (E.D. Tex. Apr. 24, 2024) (“Chambers Litigation).
In the Ryan Litigation, in addition to the complaint, the plaintiff also filed a motion to stay the Effective Date of the Final Rule and for Preliminary Injunction. Because the Ryan Litigation was the first case filed to challenge the FTC’s Final Rule, it became the battleground for deciding the enforceability of the Final Rule. In the Chambers Litigation, the presiding judge stayed the case, concluding that, because Ryan, LLC had filed its complaint the day before the plaintiffs in the Chambers Litigation did, “considerations of comity” warranted “moving related proceedings to” the Ryan court. Subsequently, the Chamber of Commerce of the United States of America, Business Roundtable, Texas Association of Business, and Longview Chamber of Commerce filed a motion to intervene as plaintiffs in the Ryan Litigation (the “Plaintiff-Intervenors”), and the Ryan court granted the motion, making them plaintiffs in that case. Unsurprisingly, one day after the motion was granted, these new plaintiffs also filed a motion to stay the Effective Day of the Final Rule and for Preliminary Injunction.
On July 3, 2024 the Texas court in the Ryan issued an opinion that partially blocked the FTC” rule set to take effect September 4, 2024 banning non-compete agreements finding, among other things, that the FTC lacked the statutory authority to create the rule banning non competes. Unfortunately, the Texas court did not issue a nationwide injunction, instead choosing only to apply the stay to Plaintiffs. Significantly, however, the Texas court noted that it will issue a final decision on the merits of the FTC non-compete ban on or before August 30, 2024, just five days before FTC rule is set to take effect. Although we expect a ruling invalidating the Rule, because of the narrow window between the Court’s expected ruling and the effective date of the FTC Rule, businesses should continue at least some preparation for an adverse court ruling permitting implementation of the Rule.
As noted above, separate from the FTC Rule, there has been a proliferation of state law changes in this space. It remains important for businesses to update their existing agreements now, and periodic update of IP protection, trade secret and confidentiality best practices is more important than ever.
If you have any questions, please contact your Michael Best attorney.