Judicial pushback on FTC's non-compete ban highlights regulatory overreach and limits of agency authority
Highlights:
- On August 20, 2024, the U.S. District Court for the Northern District of Texas ordered that the FTC's broad non-compete ban is unlawful.
- The court stopped it from taking effect on Sept. 4, 2024, as had been scheduled.
- Regulatory power could now shift to state legislatures, potentially leading to a patchwork of state-specific non-compete laws and increased complexity.
In one of the most highly anticipated employment law decisions this year, on Aug. 20, 2024, the United States District Court for the Northern District of Texas ordered that the Federal Trade Commission's (FTC) broad non-compete ban (the Final Rule) is unlawful and stopped it from taking effect on Sept. 4, 2024, as had been scheduled. The decision applies nationwide, meaning the FTC's Final Rule cannot be enforced for employers anywhere in the United States as of now.
On April 23, 2024, the FTC initially voted 3-2 to approve the Final Rule, which would ban post-employment non-compete clauses for all workers, including employees and independent contractors, with a limited exception for existing non-compete agreements already entered into with “senior executives” – a term defined very narrowly. After the effective date of the Final Rule, an employer would not be permitted to enter into a non-compete agreement with any worker, even a senior executive.
Legal challenges to the Final Rule raged on all summer in different venues, including federal courts in Texas, Pennsylvania, and Florida, with various preliminary outcomes as non-compete proponents vied to halt the Final Rule before it became effective. In the Texas case, Ryan, LLC v. FTC, the Texas federal district court signaled in July that it was likely to block the Final Rule when it granted preliminary relief enjoining the FTC from implementing or enforcing the Final Rule as to the named plaintiffs and plaintiff intervenors in the case. Shortly thereafter, the plaintiffs and plaintiff intervenors filed motions for summary judgment, with the FTC filing a cross-motion for summary judgment.
Meanwhile, in mid-July, in ATS Tree Services, LLC v. FTC, another plaintiff sought to challenge the Final Rule in Pennsylvania. The Pennsylvania court, however, ruled in the FTC's favor and declined to grant a preliminary injunction enjoining the Final Rule.
In early August, a Florida court also faced a challenge to the Final Rule and issued a preliminary decision in Properties of the Villages Inc. v. FTC enjoining the Final Rule from taking effect, but only for the specific plaintiff in that case. In doing so, the Florida court held that under the major questions doctrine, the FTC had overstepped its legal authority in imposing the Final Rule because a topic as major as a non-compete ban belongs to Congress and not to an administrative agency such as the FTC.
All eyes were then on the Texas federal district court in Ryan as the Final Rule's Sept. 4 effective date drew near. Approximately two weeks before the impending effective date, on Aug. 20, the court granted the plaintiffs' and plaintiff intervenors' summary judgment motion and denied the FTC's summary judgment motion, holding that the FTC lacked the statutory authority to promulgate the Final Rule, and that the Final Rule was arbitrary and capricious.
As to the scope of the relief, the court rejected the FTC's argument that it should be limited to the named plaintiffs and plaintiff intervenors, reasoning that setting aside agency action under the pertinent section of the Administrative Procedure Act has a nationwide effect, is not party-restricted, and affects persons in all judicial districts equally.
The Texas court's decision to issue a final judgment makes its order appealable. The FTC has until October 19, 2024, to appeal the decision to the U.S. Court of Appeals for the Fifth Circuit, though its prospects of success there seem relatively low given the Fifth Circuit's recent rejection of federal agency rulemaking in a case involving the U.S. Department of Labor.
The cases in Pennsylvania and Florida also continue on, with final decisions ultimately expected on the merits, which could lead to circuit splits if appealed from the respective district courts and a potential battle all the way up to the U.S. Supreme Court.
For now, non-compete proponents can breathe a huge sigh of relief as the Final Rule is blocked for the foreseeable future (the Final Rule most likely will remain unenforceable during any appeal), and employers will not be required to send notices to employees invalidating their non-competes. Of course, employers are still required to comply with applicable state law, and the potential for state legislatures, including in New York, to pursue their own legislative agenda is expected.
Originally Published by HR.com
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