Federal noncompete ban now on hold

By Trent Cotney.

Businesses may want to review their use of noncompete agreements and consider alternatives if the ban goes into effect on schedule.

As you may recall, in April 2024, the Federal Trade Commission (FTC) issued a rule banning most noncompete agreements. Shortly after that FTC mandate, Ryan LLC, a Dallas tax services company, sued to block it. The U.S. Chamber of Commerce joined that firm in its complaint.

On Wednesday, July 3, a federal court in Texas reviewed the complaint and partially blocked the noncompete ban scheduled to take effect on September 4. Judge Ada Brown, U.S. District Court for the Northern District of Texas, provided the decision, explaining that the plaintiffs will likely be successful in their opposition to the rule and blocking it is in the best public interest. She also noted that blocking the ban is temporary, but the court will rule on the complaint’s merits no later than August 30, 2024.

Background of the noncompete ban

Approximately 20 percent of U.S. workers—perhaps as many as 30 million people—have signed noncompete agreements as part of their employment stipulations. These agreements can prevent employees from accepting jobs with competitors or starting businesses of their own, impacting all kinds of workers, from hourly earners to executive roles.

The FTC voted 3-2 along party lines to enact the ban on noncompete agreements. It would prohibit all future employment-based agreements and cancel most of the noncompetes already in place.

Details from the complaint

Ryan asserted that the ban on noncompetes would cause “serious and irreparable injuries” to its business and put confidential information at risk. It would also allow its competitors to lure away experienced and valuable employees.

In its complaint, Ryan LLC argued that the FTC had overstepped its authority when it declared all noncompete agreements to be anticompetitive and unfair. Judge Brown agreed with that assessment. She wrote: “The FTC lacks substantive rulemaking authority with respect to unfair methods of competition.”

In response, the FTC issued a statement defending its authority. Douglass Farrar, FTC spokesperson, stated: “We will keep fighting to free hardworking Americans from unlawful noncompetes, which reduce innovation, inhibit economic growth, trap workers and undermine Americans’ economic liberty.”

What the temporary order indicates

It is important to note that this temporary order only enjoins the enforcement of the rule against the plaintiffs—Ryan LLC and the U.S. Chamber of Commerce (not including its members). Judge Brown explained that a nationwide injunction was not yet supported; however, enforcement of the ban will not take effect until September.

The court will consider the merits of a permanent injunction presumably by the end of August.

Final thoughts

For now, businesses may still want to review their use of noncompete agreements and consider alternatives if the ban goes into effect on schedule. Alternatives include invention protection, nonsolicitation agreements and nondisclosure agreements.

Keep in mind that even if the FTC rule is struck down, some states still have noncompete bans in place.

The information contained in this article is for general educational information only. This information does not constitute legal advice, is not intended to constitute legal advice, nor should it be relied upon as legal advice for your specific factual pattern or situation.

About Trent Cotney

Trent Cotney is a partner and Construction Practice Group Leader at the law firm of Adams and Reese LLP and NRCA General Counsel. For more information or to contact Trent, go to www.cotneycl.com.