As discussed in a prior Taft law bulletin, the Federal Trade Commission (FTC) recently issued a new rule that — if implemented — would ban virtually all noncompete agreements covering workers in the United States beginning Sept. 4, 2024.
Unsurprisingly, the rule was immediately challenged in multiple federal courts. These legal challenges have resulted in preliminary rulings with conflicting outcomes – a reality that leaves employers on uncertain footing likely to last beyond the rule's purported effective date of Sept. 4, 2024. Without a clear interpretation of the rule or a known timeline in which these discrepancies will be resolved, impacted employers should consult with counsel to determine a plan of action that makes the most sense for their business.
In the meantime, for updated information about the legal developments, and what they mean for employers nationwide, read below. Taft attorneys will update this webpage periodically as warranted by new developments.
Ryan LLC (Northern District of Texas)
On July 3, 2024, a judge of the U.S. District Court for the Northern District of Texas held in Ryan LLC v. Federal Trade Commission, 3:24-cv-986, that the FTC likely exceeded its statutory authority in promulgating such a sweeping, national ban on noncompete agreements. The court's decision does not apply beyond the plaintiffs to that lawsuit, but it does cast serious doubt about the FTC's authority and ability to enforce the rule.
Ryan LLC consolidates challenges to the FTC rule brought by a tax services firm and several business groups the court permitted to intervene after they filed a similar lawsuit in the Eastern District of Texas. Collectively, these plaintiffs argued that the FTC's actions in issuing the rule were unlawful for four reasons: (1) the FTC exceeded its statutory authority under the Federal Trade Commission Act (FTCA); (2) the FTC's actions were arbitrary and capricious under the Administrative Procedures Act (APA); (3) the structure of the FTC is unconstitutional; and (4) the FTC's interpretation of the FTCA, if accepted, would involve an unconstitutional delegation of legislative authority to the FTC. The plaintiffs requested preliminary and permanent injunctions to prevent the FTC from enforcing the rule.
In granting the plaintiffs' request for a preliminary injunction prohibiting the FTC from enforcing the rule against the Ryan LLC plaintiffs, the court held that the plaintiffs had shown a likelihood of success on the merits with respect to their statutory arguments under the FTCA and the APA. With respect to the FTCA, the court held that the FTC likely lacks the authority to issue substantive rules — as opposed to interpretive or procedural rules. With respect to the APA, the court held that the FTC's actions were likely arbitrary and capricious. Among other criticisms, the court faulted the FTC for failing to identify evidence that would support such a broad, categorical ban on noncompete agreements, failing to consider the positive benefits of noncompete agreements, and failing to adequately address less disruptive alternatives. The court declined to decide the plaintiffs' constitutional arguments, explaining that it was unnecessary to do so given its finding that plaintiffs were likely to succeed on their statutory arguments. The court also indicated that it intended to issue a decision on the merits of the plaintiffs' requests for a permanent injunction by the end of August 2024. No such decision has yet been issued, but it is expected before Aug. 30.
Notably, the court declined the plaintiffs' request for a nationwide injunction precluding the FTC from enforcing the rule against employers who were not involved in the Ryan LLC lawsuit. The court also declined to extend its ruling to the members of the business groups that were allowed to intervene in the lawsuit. As such, this ruling did not alter the obligation of most employers to comply with the FTC rule.
ATS Tree Services, LLC (Eastern District of Pennsylvania)
In the wake of the ruling in Ryan, LLC — and in stark contrast to it — a federal district court in Pennsylvania ruled in ATS Tree Services, LLC v. Federal Trade Commission, 2:23-cv-01743-KBH that the FTC likely acted within its proper statutory authority when it enacted the near total ban on noncompete agreements. Based on this interpretation, the Pennsylvania court, unlike the court in Texas, refused to enjoin the FTC rule from taking effect, even for the parties to the lawsuit.
The Pennsylvania ruling directly conflicts with the ruling out of Texas — the former upholding the FTC's authority to issue the ban, and the latter invalidating the rule but refusing to provide a nationwide remedy. Though these rulings are preliminary, their conflicting analyses signal that the FTC rule may be interpreted and implemented differently depending on where it is enforced.
Properties of the Villages Inc. (Middle District of Florida)
On Aug. 14, 2024, a judge in the U.S. District Court for the Middle District of Florida ruled on another motion to temporarily stall the enforcement of the FTC rule. In Properties of the Villages, Inc. v Federal Trade Commission, 5:24-cv-316-TJC-PRL, the Florida court granted the plaintiffs' motion for a preliminary injunction, staying the enforcement of the FTC rule as to the plaintiffs in that lawsuit. The Florida court, like the Texas court in Ryan, LLC, did not enjoin the FTC rule nationwide.
Though the court in Properties of the Villages issued the same bottom-line ruling as the Texas court in Ryan, LLC, it is worth noting that the court cited a different basis for doing so. The Florida court ruled that the FTC rule should be enjoined because it violates the "major questions doctrine." In other words, the FTC rule implicates a major question that affects a significant portion of the economy and that, historically, has fallen under the purview of state law. Accordingly, the FTC needed clear congressional permission to issue this rule.
What's next?
On this page, Taft's attorneys will continue to provide further updates regarding any successful challenges to the FTC's rule as they occur. Although the ultimate fate of the rule is not yet known, the preliminary injunction decisions from the Northern District of Texas and the Middle District of Florida cast serious doubt on the FTC's authority to enforce the rule. Even so, the rulings in those cases do not extend to employers outside the plaintiffs in those lawsuits. Employers should continue to monitor the rulings in the pending lawsuits, in particular the ruling in Ryan LLC, which is expected to be issued before the end of August.
The conflicting outcomes of the decisions discussed above reinforce what has historically been true — that the enforceability of noncompete agreements requires a holistic analysis that takes into account the state laws and business interests at issue, among other considerations.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
