On July 3, 2024, Judge Ada Brown of the U.S. District Court (Northern District of Texas) issued a decision that has sent some shockwaves through the American business landscape. In Ryan LLC v. FTC the court blocked a recent Federal Trade Commission (FTC) regulation that sought to ban worker noncompete contracts nationwide.

Noncompete clauses that restrict employees from working for or starting competing businesses after leaving their current employer have been a contentious issue for years. Proponents argue they protect legitimate business interests and trade secrets, while critics contend they stifle innovation, limit worker mobility, and suppress wages.

In early 2024, the FTC issued a sweeping regulation that sought to ban most noncompete agreements nationwide. The commission argued that these clauses constituted an unfair method of competition, harming both workers and innovation. The regulation was set to take effect later in the year, potentially freeing millions of workers from existing noncompete obligations and prohibiting new agreements. (You can read my article on the new regulation here.)

Judge Brown's decision came in response to a legal challenge brought by several business groups and chambers of commerce. Judge Brown issued a preliminary injunction stopping the rule from going into effect prior to her issuing a full court decision. In her ruling, judge Brown found that the FTC had likely exceeded its statutory authority in attempting to implement such a broad ban on noncompetes. The injunction prevents the FTC from enforcing its ban while the case proceeds. While the preliminary injunction applies only to the parties to the lawsuit, it is not yet clear whether the decision applies to all employers. The hurdle for getting a preliminary in junction is a high one, and the fact that it was issued means the court found a substantial likelihood that the parties challenging the FTC would win.

This decision effectively maintains the status quo, allowing states to continue regulating noncompete agreements according to their own laws and precedents. Judge Brown said she intends to issue her substantive ruling by the end of August – prior to the date the rule was to go into effect.

Implications for U.S. Businesses

Here are the key takeaways:

1. Regulatory Uncertainty: The immediate impact of creates regulatory uncertainty for businesses. Companies that had been preparing to comply with the FTC's ban should reassess their strategies.
2. State-by-State Variations: With oversight of noncompetes possibly returning to the states, businesses operating across multiple jurisdictions should consider each state where they operate since each has its own laws regarding the enforceability of noncompete agreements. Many states have moved in recent years to prohibit or restrict non-compete agreements and that movement deserves continued attention.
3. Compliance Costs: Businesses operating nationwide will likely face increased compliance costs as they are forced to navigate varying state laws on noncompetes. This may include expenses for legal counsel, contract revisions, human resource policies and handbooks, and potential litigation in different jurisdictions.
4. Competitive Considerations: Companies in states with weaker noncompete enforcement may gain a competitive advantage by focusing on protecting trade secrets (using nondisclosure agreements and internal security protocols) and customer relationships (by using carefully drafted non-solicitation agreements). This is also a state-by-state concern as state rules regarding non-solicitation agreements and specifics of trade secret protection can vary.
5. Potential for Federal Legislation: Judge Brown's ruling could spur congressional efforts to address noncompete agreements, especially following the Supreme Court’s recent overturning of the so-called “Chevron doctrine,” which further eroded the power of federal agencies. This may be a long shot though given the current political environment.

What Should You Do Now?

Judge Brown said she would rule on the merits of the case by the end of August. The FTC rule will become effective September 4 unless there is a court decision that the case applies to all employers. The fact that an injunction was issued suggests that this judge may be inclined to decide the rule is not permissible and strike it down. While such a decision against the FTC might trigger an appeal, whether that appeal would be pursued depends on the outcome of the November election. Stay tuned.

For additional information please contact Michael Radin, Esq. of Tarlow Breed Hart & Rodgers, P.C. at (617) 218-2000 or at mradin@tbhr-law.com.