Federal Court Issues Temporary Stay on FTC Noncompete Ban

The U.S. District Court for the Northern District of Texas, Dallas Division, issued a preliminary injunction enjoining the Federal Trade Commission’s ban on noncompete agreements in the case Ryan LLC et al. v. Federal Trade Commission. The U.S. Chamber of Commerce is a co-plaintiff in the suit.

The FTC finalized the ban in April, which makes unenforceable all noncompete agreements for employees leaving an employer, but does not affect non-solicitation agreements, often used as a way to stop advisers from bringing or poaching clients when they leave a firm.

A noncompete agreement is a contract, often required as a condition of employment, that prevents an employee from leaving the employer to work for another employer or to start a new business within a set period of time after leaving the employer.

Current noncompete contracts signed by executives will be allowed to run their course but may not be renewed, according to the FTC’s rule, which takes effect on September 4.

The injunction in Ryan only applies to the plaintiffs at hand and is not a national injunction. The court wrote that it will render a final ruling on the merits by August 30.

In the injunction, the court found that the plaintiffs are likely to be successful on the merits, which does not bode well for the FTC. The court noted that the plaintiffs would suffer irreparable harm in the absence of a preliminary injunction because their employees would be permitted to start new businesses and accept better job offers elsewhere.

The FTC has the authority to issue “housekeeping” rules related to process and not “substantive” rules, the court said, and can also issues case-by-case rulings on matters related to unfair or deceptive practices.

The FTC has argued that it has rulemaking authority over anti-competitive practices; the court answered that those provisions have “no penalty provision—which indicates a lack of substantive force.”

The court wrote that “the text, structure, and history of the FTC Act reveal that the FTC lacks substantive rulemaking authority with respect to unfair methods of competition.”