The First Ruling Is In: FTC Noncompete Rule Enjoined – But No Nationwide Impact

07/04/2024|5 minute read

Key Takeaways

• The FTC's Rule largely banning employment-based noncompetes has been blocked by a Texas District Court Judge in Ryan, LLC v. Federal Trade Commission. But the injunctive relief against enforcement only applies in that Texas case. The court declined to impose a nationwide injunction.
• This mixed result imposes great uncertainty for employers and employees. Further litigation in the Texas case and around the country seeking clarification of the nationwide impact leading up to the Sept. 4 effective date of the FTC Rule is anticipated. The District Court in Texas indicated that it will issue a further plenary decision on the merits by Aug. 30, which may clarify the scope.
• All eyes now turn to the Eastern District of Pennsylvania to see whether the court in ATS Tree Services, LLC v. Federal Trade Commission, where a hearing is scheduled for Wednesday, July 10, will follow or contradict the Texas ruling. We will issue a further alert following that court date.

What Happened?

Following extensive briefing from Ryan LLC (Ryan), the U.S. Chamber of Commerce (Chamber), the Federal Trade Commission (FTC) and briefs from dozens of amicus curiae, the United States District Court for the Northern District of Texas concluded on July 3 that the FTC likely exceeded its authority when it issued its rule largely prohibiting employment-based noncompete agreements (the Noncompete Rule). The court issued an order to stay the effective date of the FTC from enforcing the Noncompete Rule, but only as to the parties to the case. This means that, unless there is a superseding order, the September 4 effective date for the Noncompete Rule remains valid as applied to companies and employees that are not parties to the Texas case.

As to its decision not to implement a nationwide injunction, the District Court found that it "standing and redressability concerns regarding nationwide injunctive relief in this case." However, the "Plaintiffs [] offered virtually no briefing (or basis) that would support 'universal' or 'nationwide' injunctive relief. . . . Plaintiffs have offered no briefing as to how or why nationwide injunctive relief is necessary to provide complete relief to Plaintiffs, at this preliminary stage." Accordingly, the court limited the scope of its injunction at this time.

In reaching its decision to issue an injunction, the court made a number of notable findings, which if adopted by other courts, undercut the FTC's ability to broadly enforce the Noncompete Rule. Among them:

• "[T]he FTC has some authority to promulgate rules to preclude unfair methods of competition. . . . However, after reviewing the text, structure, and history of the Act, the Court concludes the FTC lacks the authority to create substantive rules through this method. Section 6(g) is "indeed a 'housekeeping statute,' authorizing what the APA terms 'rules of agency organization procedure or practice' as opposed to 'substantive rules.'""
• "The Court concludes the text and the structure of the FTC Act reveal the FTC lacks substantive rule-making authority with respect to unfair methods of competition, under Section 6(g). [] Thus, when considering the text, Section 6(g) specifically, the Court concludes the Commission has exceeded its statutory authority in promulgating the Non-Compete Rule, and thus Plaintiffs are likely to succeed on the merits."
• "[T]he evidence put forth by the Commission does not warrant the Non-Compete Rule's expansive ban. In enacting the Rule, the Commission relied on a handful of studies that examined the economic effects of various state policies toward non-competes. [] However, no state has ever enacted a non-compete rule as broad as the FTC's Non-Compete Rule."
• "The FTC dismissed any possible alternatives, merely concluding that either the pro-competitive justifications outweighed the harms, or that employers had other avenues to protect their interests. . . . As such, the Court concludes the Rule is arbitrary and capricious."
• "On this record, it is evident that if the requested injunctive relief is not granted, the injury to both Plaintiffs and the public interest would be great. Granting the preliminary injunction serves the public interest by maintaining the status quo and preventing the substantial economic impact of the Rule, while simultaneously inflicting no harm on the FTC."

The mixed result in the District Court's decision, whereby the court has found a likelihood that the FTC lacked authority to implement the Noncompete Rule, but limited the scope of relief, leaves most US employers in limbo. Although the court noted that it would "enter a merits disposition" on or before August 30, if the result of that decision is not a nationwide injunction, employers may be forced to fight case-by-case with the FTC over application of the Noncompete Rule to their specific business. For many employers, and employees, looking for certainty - this is an uncertain result.

How Did We Get Here?

The national debate over the use of employment non-compete agreements first came to a head on July 9, 2021, when President Joe Biden signed the Executive Order on Promoting Competition in the American Economy (the Order). The Order, among other things, "encouraged" the "Chair of the FTC . . . to consider working with the rest of the Commission to exercise the FTC's statutory rule-making authority . . . to curtail the unfair use of non-compete clauses and other clauses or agreements that may unfairly limit worker mobility."

A year and a half after the Order, the FTC announced its proposed rule, which would ban nearly all non-compete agreements for all employees in the United States. Following more than 25,000 public comments, and more than a year later, the FTC published its final Noncompete Rule on April 23, 2024. The Noncompete Rule, which maintained most - but not all - of the extreme restrictions of the proposed rule, is scheduled to go into effect on September 4, 2024

The Noncompete Rule, and particularly the FTC's authority to promulgate such a rule, was immediately challenged. The first case was filed by Ryan in the Northern District of Texas on April 23, mere hours after the Noncompete Rule was published. The next day, the U.S. Chamber of Commerce filed suit in the Eastern District of Texas on April 24 (after Ryan's complaint was filed) and ATS Tree Services filed in the Eastern District of Pennsylvania on April 25. The Chamber of Commerce case was dismissed pursuant to the first-to-file doctrine, and the Chamber intervened in the Ryan case.

Now, following briefing by the parties and amici, District Judge Ada Brown (nominated by President Donald Trump in 2019) has granted Ryan's and the Chamber's application for a temporary restraining order, blocking the effective date of the Noncompete Rule until the merits of the case can be decided. Judge Brown's injunction, and ban on enforcement, however, only applies to the parties in the case before her. The court will issue a further disposition on the merits on or before August 30.

Next Steps

With the granting of the injunction, the world of employment noncompetes has been thrown into further confusion. Although a District Judge has ruled that the FTC did not have authority to promulgate the Noncompete Rule, the court only enjoined enforcement of the rule against the named parties to the case. The court could expand its ruling in the anticipated August 30 decision, or the court in ATS Tree Services may issue a broader injunction, but those entities and individuals who use or are subject to noncompetes remain without clear guidance. We expect there will be a proliferation of challenges to the FTC's Noncompete Rule. This may also include private party noncompete cases regarding enforcement of employment-based noncompetes following the September 4 effective date of the Noncompete Rule.

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