Earlier today, July 3, 2024, the United States District Court for the Northern District of Texas issued a preliminary injunction staying enforcement of the Federal Trade Commission’s (“FTC”) proposed final rule (“Final Rule”) banning most noncompete agreements in the United States.  However, the court’s preliminary injunction is limited in scope—it stays the Final Rule’s effective date and enjoins the FTC from enforcing it only against the plaintiffs before the Court.  For all other employers, the Final Rule will still take effect on September 4, 2024 unless halted by pending legal challenges (or others yet to be filed).

Procedural History

On April 23, 2024, hours after the FTC issued the Final Rule, Ryan LLC, a global tax services firm based in Dallas, Texas, filed suit in Ryan LLC v. Federal Trade Commission, No. 3:24-cv-00986-E (N.D. Tex. Apr. 23, 2024) seeking a preliminary injunction to stay enforcement of the Final Rule. The next day, the U.S. Chamber of Commerce, Business Roundtable, Texas Association of Business, and Longview Chamber of Commerce filed a lawsuit in the Eastern District of Texas challenging the Final Rule on similar grounds.  The Chamber of Commerce lawsuit was halted in favor of the Ryan action, which was filed first.  On May 9, 2024, the Chamber of Commerce and affiliated groups intervened and joined as plaintiffs in Ryan (together with Ryan LLC, the “Ryan Plaintiffs”).  Another lawsuit challenging the Final Rule was filed by ATS Tree Services, LLC in the Eastern District of Pennsylvania, which is still underway. The court in that action is expected to reach a decision on whether to grant injunctive relief on July 23, 2024. 

The Court’s Decision

The Northern District of Texas granted the Ryan Plaintiffs’ request for a preliminary injunction staying the effective date of the Final Rule.  Notably, in holding that the Ryan Plaintiffs had demonstrated a likelihood of success on the merits, the court concurred with their arguments that the Final Rule exceeded the FTC’s statutory authority under the FTC Act and was arbitrary and capricious under the Administrative Procedures Act.  The court found that the FTC lacks authority under Section 6(g) of the FTC Act (upon which it relies) to issue substantive rules, as opposed to merely procedural ones. The court also found a substantial likelihood that the Final Rule would be considered arbitrary and capricious, pointing to its “one-size-fits-all approach with no end date,” the FTC’s reliance on state-specific studies as justification for a nationwide ban, and the FTC’s failure to consider less disruptive alternatives.    

Significantly, the court declined to issue a nationwide injunction.  Citing to 5th Circuit decisions, the court noted that while a nationwide injunction was not beyond its powers “in appropriate circumstances,” recent precedents supported limiting injunctive relief to the plaintiffs before the court. The court also found that the Ryan Plaintiffs had not briefed why a nationwide injunction was necessary to provide them with complete relief, nor sufficiently demonstrated associational standing, which would permit relief to be granted to their member entities.  Accordingly, the court declined to stay enforcement of the Final Rule beyond the Ryan Plaintiffs themselves (Ryan LLC; U.S. Chamber of Commerce; Business Roundtable; Texas Association of Business; and Longview Chamber of Commerce).

What Happens Next?

The Northern District of Texas has preliminarily stayed the Final Rule and stated it intends to rule on the ultimate merits of the action on or before August 30, 2024.  However, either party may appeal the court’s decision to the United States Court of Appeals for the Fifth Circuit within 60 days.  If the Fifth Circuit affirms the district court’s ruling, the FTC may choose to modify and re-issue the Final Rule. The case could also ascend to the United States Supreme Court. 

While the Ryan court declined to issue a nationwide injunction, the Eastern District of Pennsylvania in ATS Tree Services, LLC still has opportunity to do so in its forthcoming decision on July 23, 2024.

Key Considerations for Employers

In light of the limited scope of the court’s decision today, employers should be aware that unless blocked by subsequent legal challenges, the Final Rule will still take effect on September 4, 2024.  Regardless of the fate of the Final Rule, employers should continue to be mindful of the growing challenges and risks surrounding the use of restrictive covenants, as highlighted by recent actions by state legislatures and other regulatory agencies.  While certain states like California have historically banned noncompete agreements (with very limited exceptions), many others, including Colorado, Illinois, Maryland, and Massachusetts, have recently passed legislation restricting the use of non-competition agreements, such as by prohibiting their use with respect to low-wage employees and/or imposing additional notice or consideration requirements.

While the legal challenges to the Final Rule continue to unfold, employers should evaluate their non-compete agreements for compliance with the Final Rule and state laws and consider possible alternatives.  With respect to compliance with the Final Rule, employers should focus on the following:

  • The Final Rule does not prohibit non-competes during employment, nor does it expressly ban confidentiality, non-disparagement, or non-solicitation agreements. It does, however, prohibit any provisions that “penalize a worker for or functions to prevent a worker” from seeking work elsewhere.  While the scope of this prohibition remains uncertain, the FTC has suggested that “penalize” includes, among other things, forfeiture for competition provisions which impose adverse financial consequences on former employees that seek or accept competing work after separation.  However, a garden leave arrangement may be permissible, as the worker would continue to be employed.  Similarly, an agreement providing for repayment of bonus compensation may be permitted so long as it does not impose post-employment restrictions on the worker.  However, employers should continue to ensure that they comply with state-specific requirements for any such agreements. 
  • While employers would be prohibited from entering into new non-competes should the Final Rule take effect, pre-existing non-competes with “senior executives” would remain enforceable.  Employers may still consider the use of non-compete agreements with employees qualifying as “senior executives” under the Final Rule, which requires that they earn at least $151,164 in total annual compensation and work in a “policy-making position.”  For employees who do not qualify as “senior executives,” the Final Rule would require that they be provided with notices informing them that their non-competes will not be enforced and offers model language providing a safe harbor for compliance with this requirement.
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Photo of Steven J. Pearlman Steven J. Pearlman

Steven J. Pearlman is a partner in the Labor & Employment Law Department, where he is Head of the Restrictive Covenants, Trade Secrets & Unfair Competition Group and Co-Head of the Whistleblowing & Retaliation Group.

Employment, Whistleblower, Restrictive Covenant and Trade Secret Practice.

Steven J. Pearlman is a partner in the Labor & Employment Law Department, where he is Head of the Restrictive Covenants, Trade Secrets & Unfair Competition Group and Co-Head of the Whistleblowing & Retaliation Group.

Employment, Whistleblower, Restrictive Covenant and Trade Secret Practice. Steven’s national practice focuses on defending companies in federal and state courts and arbitration against claims of: discrimination, retaliation and harassment, including claims brought by high-level executives; whistleblower retaliation; restrictive covenant violations; theft of trade secrets; and wage-and-hour violations (including class, collective and PAGA actions).

Illustrating his versatility, Steven has successfully handled bench and jury trials in multiple jurisdictions (e.g., Illinois, California, Florida and Texas); defended one of the largest Illinois-only class actions in the history of the federal courts in Chicago; and prevailed following his oral arguments before the Seventh Circuit and state appellate courts. Steven brings his litigation experience to bear in counseling clients to minimize risk and avoid or prepare for success in litigation.

Investigations. Reporting to boards of directors, their audit committees, CEOs and in-house counsel, Steven conducts sensitive investigations and has testified in federal court. His investigations have involved complaints of sexual harassment involving C-suite officers; systemic violations of employment laws and company policies; and fraud, compliance failures and unethical conduct.

Thought Leadership and Accolades. Steven was named Lawyer of the Year for Chicago Labor & Employment Litigation in the 2023 edition of The Best Lawyers in America. He was also named as One of the Top 10 Impactful Labor & Employment Lawyers in Illinois for 2023 by Business Today. He is a Fellow of the College of Labor and Employment Lawyers. Chambers describes Steven as an “outstanding lawyer” who is “very sharp and very responsive,” a “strong advocate,” and an “expert in his field.” Chambers also reports that “He is someone who can navigate the twists and turns of litigation without difficulty. Steven is great with brief-writing, crafting arguments, and making sure the client is always happy.”

Steven was 1 of 12 individuals selected by Compliance Week as a “Top Mind.” Earlier in his career, he was 1 of 5 U.S. lawyers selected by Law360 as a “Rising Star Under 40” in the area of employment law and 1 of “40 Illinois Attorneys Under Forty to Watch” selected by Law Bulletin Publishing Company. Steven is a Burton Award Winner (U.S. Library of Congress) for “Distinguished Legal Writing.”

Steven was appointed to Law360’s Employment Editorial Advisory Board and selected as a Contributor to Forbes.com. He has appeared on Bloomberg News (television and radio) and Yahoo! Finance, and is often quoted in leading publications such as The Wall Street Journal.

The U.S. Chamber of Commerce has engaged Steven to serve as lead counsel on amicus briefs to the U.S. Supreme Court and federal circuit courts of appeal. He was appointed to serve as a Special Assistant Attorney General for the State of Illinois in employment litigation matters. He has presented with the Solicitor of the DOL, the Acting Chair of the EEOC, an EEOC Commissioner, Legal Counsel to the EEOC, and heads of the SEC, CFTC and OSHA whistleblower programs. He is also a member of the Sedona Conference, focusing on trade secret matters.

In 2024, Steven received the Excellence in Pro Bono Service Award from the United States District Court for the Northern District of Illinois and the Chicago Chapter of the Federal Bar Association.

Photo of Allan Bloom Allan Bloom

Allan Bloom is the co-chair of Proskauer’s Labor & Employment Law Department and a nationally recognized litigator and advisor who represents employers, business owners, and management in a broad range of employment and labor law matters. As a litigator, Allan has successfully defended…

Allan Bloom is the co-chair of Proskauer’s Labor & Employment Law Department and a nationally recognized litigator and advisor who represents employers, business owners, and management in a broad range of employment and labor law matters. As a litigator, Allan has successfully defended many of the world’s leading companies against claims for unpaid wages, employment discrimination, breach of contract and wrongful discharge, both at the trial and appellate court levels as well as in arbitration, before government agencies, and in private negotiations. He has secured complete defense verdicts for clients in front of juries, as well as injunctions to protect clients’ confidential information and assets.

As the leader of Proskauer’s Wage and Hour Practice Group, Allan has been a strategic partner to a number of Fortune 500 companies to help them avoid, minimize and manage exposure to wage and hour-related risk. Allan’s views on wage and hour issues have been featured in The New York TimesReutersBloomberg and Fortune, among other leading publications. His class-action defense work for clients has saved billions of dollars in potential damages.

Allan is regularly called on to advise operating companies, management companies, fund sponsors, boards of directors and senior leadership on highly sensitive matters including executive and key person transitions, internal investigations and strategic workforce planning. He has particular expertise in the financial services industry, where he has litigated, arbitrated, and mediated disputes for more than 20 years.

A prolific author and speaker, Allan was the Editor of the New York State Bar Association’s Labor and Employment Law Journal from 2012 to 2017. He has served as an author, editor and contributor to a number of leading treatises in the field of employment law, including ADR in Employment Law (ABA/Bloomberg BNA), Employment Discrimination Law (ABA/Bloomberg BNA), Cutting Edge Advances in Resolving Workplace Disputes (Cornell University/CPR), The Employment Law Review (Law Business Research, U.S. Chapter Author), and The Complete Compliance and Ethics Manual (SCCE).

Allan has served as longtime pro bono counsel to Lincoln Center for the Performing Arts and The Public Theater, among other nonprofit organizations.  He is a past Vice Chair of Repair the World, a nonprofit organization that mobilizes volunteers and their communities to take action to pursue a just world, and a past recipient of the Lawyers Alliance Cornerstone Award for extraordinary contributions through pro bono legal services.

Allan is a Fellow of the College of Labor and Employment Lawyers and has been recognized as a leading practitioner by Chambers since 2011.

Photo of Lloyd B. Chinn Lloyd B. Chinn

Lloyd B. Chinn is a partner in the Labor & Employment Law Department and co-head of the Whistleblowing & Retaliation Group. He litigates employment disputes of all types before federal and state courts, arbitration tribunals (e.g., FINRA, JAMS and AAA), and before administrative…

Lloyd B. Chinn is a partner in the Labor & Employment Law Department and co-head of the Whistleblowing & Retaliation Group. He litigates employment disputes of all types before federal and state courts, arbitration tribunals (e.g., FINRA, JAMS and AAA), and before administrative agencies in New York and across the country. Lloyd’s practice ranges from litigating compensation disputes to defending whistleblower, discrimination and sexual harassment claims. Although he represents employers in a wide range of industries, including law, insurance, health care, consulting, media, education and technology, he focuses a substantial portion of his practice on the financial services sector. He has tried to final verdict or arbitration award substantial disputes in this area.

Due to Lloyd’s litigation experience, clients regularly turn to him for advice regarding the full range of employment matters, including terminations, whistleblower policy and procedure, reductions in force, employment agreements, and employment policies. For example, in the wake of the financial crisis, he has counseled a number of firms through reductions in force and related bonus and deferred compensation disputes. Lloyd has also been retained to conduct internal investigations of allegations of workplace misconduct, including claims leveled against senior executives.

Lloyd has represented global businesses in matters involving Sarbanes-Oxley and Dodd-Frank whistleblower claims. He has taken an active role in the American Bar Association on these issues, currently serving as Co-Chair of the Whistleblower subcommittee of the ABA Employee Rights and Responsibilities Committee. Lloyd has spoken on whistleblowing topics before a numerous organizations, including the American Bar Association, ALI-ABA, Association of the Bar of the City of New York, and New York University School of Law. He has testified twice before Congressional subcommittees regarding whistleblower legislation and has also published blog postings, articles and client alerts on a variety of topics in this area, including the Dodd-Frank Act’s whistleblower provisions. Lloyd is a co-editor of Proskauer’s Whistleblower Defense Blog, and he has been widely quoted by on whistleblower topics by a number of publications, including the New York Times, the Wall Street Journal, the National Law Journal and Law 360.

Lloyd has also become active in the International Bar Association, presenting on a variety of subjects, including: the #MeToo movement, the COVID-19 pandemic and employment law, and cross-border harmonization of employment provisions in transactions. Lloyd also hosts a quarterly roundtable discussion among financial services industry in-house employment lawyers. He has also published articles and given speeches on a variety of other employment-law topics, including non-solicitation provisions, FINRA arbitration rules, cross-border discovery, e-discovery, and the use of experts.

Photo of Scott Tan Scott Tan

Scott Tan is an associate in the Labor & Employment Law Department.  Scott represents employers in a variety of matters in federal and state court, arbitrations and state and local administrative proceedings.  His practice encompasses a wide range of labor and employment matters…

Scott Tan is an associate in the Labor & Employment Law Department.  Scott represents employers in a variety of matters in federal and state court, arbitrations and state and local administrative proceedings.  His practice encompasses a wide range of labor and employment matters, including employment discrimination, retaliation, breach of contract, whistleblower claims, restrictive covenants, and wage & hour claims.  Scott also counsels clients on a diverse array of employment matters, including accommodations requests, reductions-in-force, pay equity, wage and hour issues, and compliance with federal, state, and local laws.  Scott’s recent work has involved advising and representing clients across industries such as financial services, sports, news and media, healthcare, legal services, and real estate, in matters ranging from single and multi-plaintiff lawsuits to class and collective actions.

Scott has an active pro bono practice and advises non-profit organizations on employee separations and other employment issues.  He recently secured a favorable judgment in New York state court on behalf of a charitable foundation.  Scott also co-leads Proskauer’s Moot Court Program, where he introduces local high school students to appellate advocacy and coaches them to participate in an annual competition against other New York City high schools.

Scott received his J.D. from UCLA School of Law, where he served on the Moot Court Honors Board and worked as a research assistant for Professor Jennifer Mnookin and Professor Hiroshi Motomura.