FTC’s non-compete rule stalled and unlikely to be reinstated – but risk remains

By: Lee Berger (Steptoe Antitrust)

Last week, a court temporarily blocked a Federal Trade Commission (FTC) rule banning noncompete clauses in employee contracts. However, that preliminary injunction does not apply nationwide. Despite the bleak outlook for the FTC rule, the use of noncompete clauses still poses risks under some state laws and potential individual FTC investigations. Companies concerned about noncompete provisions should continue to take precautions to be prepared for possible compliance requirements in the short term.

In April, the FTC issued a broad ban on noncompete terms that prevent employees from working for competing employers. Shortly thereafter, Ryan LLC and the U.S. Chamber of Commerce filed suit in the Northern District of Texas to block the rule. On July 3, Judge Ada Brown agreed with the plaintiffs and issued a preliminary injunction, arguing that the FTC lacks substantive authority to rule on unfair methods of competition. The court noted that while the FTC can issue rules on unfair or deceptive practices, it does not have express statutory authority to rule on unfair methods of competition. The court also found the noncompete rule to be arbitrary and capricious, criticizing its one-size-fits-all approach without an end date and the lack of evidence supporting the need for a blanket ban or consideration of potential procompetitive effects.

Judge Brown limited the request for a preliminary injunction to plaintiffs, denying a nationwide injunction. While the U.S. Chamber of Commerce claimed to represent all of its members, the court found that it was insufficiently informed. The FTC rule therefore continues to apply to all other…

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