The United States District Court for the Northern District of Texas ruled on August 20, 2024, in the case of Ryan LLC v. Federal Trade Commission, striking down the proposed ban by the Federal Trade Commission (FTC) on most noncompete agreements. Consequently, the rule will not be enforced or take effect on September 4, 2024, as originally planned, as the injunction against the FTC’s ban is applicable nationwide.

Judge Ada E. Brown ruled that “the FTC lacks substantive rulemaking authority concerning unfair methods of competition.” The Court found that the ban “…is unreasonably overbroad without a reasonable explanation. The Rule imposes a one-size-fits-all approach with no end date, which fails to establish a ‘rational connection between the facts found and the choice made.’” Therefore, the Court has determined that “the Commission’s lack of evidence as to why they chose to impose such a sweeping prohibition … instead of targeting specific, harmful noncompete agreements, renders the rule arbitrary and capricious.”

The FTC introduced the Final Rule in April 2024, asserting that noncompete clauses suppress wages and constitute an unfair method of competition. The proposed ban would have had extensive implications for several industries, including healthcare, where noncompete agreements are commonly utilized. This is especially true as hospitals and other corporate entities are employing an increasing number of doctors. Notably, hospitals, the largest employers of physicians in the United States, vehemently opposed the FTC’s proposed ban. Some groups representing medical practices, such as the American Medical Group Association, have also opposed the ban, arguing that noncompete agreements enhance patient care continuity. Generally, employers who utilize noncompete agreements often argue that they do so to safeguard trade secrets and other confidential information from competitors seeking to lure away valuable employees.

The proposed ban would have barred employers from establishing new noncompete agreements with “senior executives,” defined as individuals earning more than $151,164 annually who hold a “policymaking position.” Additionally, the rule would have mandated employers to notify current and former employees that their noncompete clauses are no longer enforceable.

Interestingly, the Texas District Court in Ryan LLC did not mention two similar cases from other district courts—the U.S. District Court for the Eastern District of Pennsylvania (ATS Tree Services, LLC v. FTC) and the Middle District of Florida (Properties of the Villages, Inc. v. Federal Trade Commission). In the Pennsylvania case, the court declined to block the FTC’s ban on noncompete agreements, stating that the FTC had the legal authority to issue the Final Rule and that the plaintiff could not prove irreparable harm if the Final Rule went into effect. In the Florida case, the court granted a preliminary injunction, finding that the FTC did not have the authority to issue such a broad ban on non-competes.

It’s important to keep in mind the following information. The issue at hand is not yet completely resolved. The FTC will probably challenge the Texas court’s decision at the 5th Circuit. Additionally, considering the differing conclusion in the Pennsylvania case, there’s potential for a circuit split if upheld by the 3rd Circuit. If this occurs, the U.S. Supreme Court will need to address and resolve the split. Lastly, it’s crucial to ensure compliance with state laws, as many states either prohibit or restrict the use of noncompete provisions.