A federal District Court in the Northern District of Texas, Dallas Division, has issued a limited injunction against the Federal Trade Commission’s (FTC) recently announced rule against employers using non-competition agreements. The FTC Rule makes entering non-competition agreements with employees and enforcing existing agreements with most employees illegal as “unfair methods of competition.” The Rule is set to go into effect on September 4, 2024.

In Ryan LLC v. FTC, the court found that the plaintiffs were likely to succeed in their claims that the FTC lacked the authority to issue substantive rules governing unfair methods of competition. The court also found that the Rule was arbitrary and capricious, including because the Rule was overbroad: the FTC had not identified any studies of the effect of such a broad ban on non-competition agreements and failed to consider any alternative, less restrictive, prohibitions. 

The court issued an injunction against enforcing the Rule but refused to extend that injunction nationwide. The injunction prohibits the FTC from implementing or enforcing the Rule against the plaintiffs. The court considered whether to extend the injunction nationwide; however, because the regulation of non-competition agreements is not currently uniform across the country, the court limited the injunction to the plaintiffs themselves and allowed it to go into effect for everyone else.

Meanwhile, a separate challenge to the Rule, ATS Tree Services, LLC v. FTC, No. 2:24-cv-1743 (E.D. Pa. 2024), is pending in the Eastern District of Pennsylvania. ATS Tree Services makes similar claims found in Ryan LLC. The plaintiffs claim the FTC overstepped its statutory authority by issuing the Rule and the Rule itself is arbitrary and capricious.  

Oral arguments in ATS Tree Services have been scheduled for July 10, 2024, on the plaintiff's motion for a preliminary injunction. District Judge Kelley Hodge has stated she will issue a ruling by July 23, 2024. There is an opportunity for Judge Hodge to issue a nationwide preliminary injunction blocking the Rule. 

Sherman & Howard will continue to update as new developments occur.