As has been widely publicized, on April 23, 2024, the Federal Trade Commission ("FTC") issued a final rule (the "Rule") intended to make most non-compete clauses in the employment context unenforceable as "unfair methods of competition." The Rule, which was slated to take effect on September 4, 2024, would invalidate existing, and prohibit future, non-compete clauses for nearly all employees across the United States.
Since April, a host of employers and other interested parties have raised legal challenges to the Rule in courts across the country, arguing that the FTC lacks the authority to promulgate such a broad and far-reaching rule. In early July, the first court to consider the issue dealt a substantial blow to the FTC when U.S. District Judge Ada Brown of the Northern District of Texas enjoined the agency from enforcing the Rule against two plaintiffs (while declining to issue a nationwide injunction against enforcement).
Yesterday, however, U.S. District Judge Kelley Brisbon Hodge in the Eastern District of Pennsylvania moved in the opposite direction. On July 23, 2024, the Court rejected a similar challenge to the Rule, denying a request for a preliminary injunction and expressly finding that the FTC had properly exercised its rulemaking authority. These conflicting holdings make clear that the enforceability of the Rule remains an open question that is unlikely to be resolved in the near term.
On July 3, 2024, Judge Brown issued the first decision addressing the FTC's authority to issue the Final Rule. In Ryan v. Federal Trade Commission, Judge Brown granted a preliminary injunction enjoining the FTC from enforcing the Rule against the Ryan plaintiffs. In doing so, the Court held that the FTC lacked the authority to issue the Rule based on "the text, structure, and history" of the Federal Trade Commission Act ("FTC Act"). Specifically, the Court found that the statutory provision relied on by the FTC did not vest the agency with the power to promulgate substantive regulations, like the Rule, that define "unfair methods of competition."
Instead, the Court explained that the subject statute was merely a 'housekeeping statute' because it authorized the FTC to establish only procedural rules to aid in its adjudication of complaints of unfair methods of competition. In reaching this conclusion, the Court noted that the FTC Act does not provide express rulemaking authority to the FTC despite numerous amendments to the Act and the lack of a statutory penalty for violations of such rules. After finding that the Rule exceeded the FTC's authority, the Court went one step further and found that the Rule was 'arbitrary and capricious' due to its unreasonably overbroad, one-size-fits-all approach to non-compete clauses.
Twenty days later, Judge Hodge ruled that the FTC maintains the power to ban non-competes. In ATS Tree Services, LLC v. Federal Trade Commission, et al., EDPA 24-1743, ECF No. 80 (July 23, 2024), a tree care company, which required its employees to sign non-compete agreements, sued the FTC and its Commissioners alleging they exceeded their authority in enacting the Rule. The plaintiff filed a Motion for Stay of Effective Date and Preliminary Injunction. Judge Hodge denied that motion.
Judge Hodge opined that the tree company's motion fails not only because it failed to establish irreparable harm as a result of the enactment, but also because it failed to demonstrate a likelihood of success on the merits. To satisfy the "success on the merits" prong, the tree company had to show reasonable probability that the FTC lacked authority under the FTC Act to issue the Rule or that Congress' delegation of such authority under the FTC Act was unconstitutional. In rendering her ruling, Judge Hodge noted that, "[w]hen taken in the context of the goal of the [FTC] Act and the FTC's purpose, the court finds it clear that the FTC is empowered to make both procedural and substantive rules as is necessary to prevent unfair methods of competition." As such, the Court found that the FTC likely has authority to issue the Rule.
The decisions in the Pennsylvania-based ATS Tree Services, LLC and the Texas-based Ryan LLC stand in stark contrast to one another. Given the uncertainty surrounding the implementation and enforceability of the Rule, employers should seek the advice of counsel regarding the enforceability of current and prospective non-compete provisions.
The employment lawyers at Lewis Brisbois are prepared to provide counseling services as to this subject and other employment law issues.
Originally published 24 July 2024
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