Noncompete Rule Legal Update: Two Pending Cases to Watch

On April 23, 2024, the Federal Trade Commission (FTC) adopted a final rule prohibiting most employers from entering into or enforcing non-compete agreements with workers, subject to exceptions for the sale of a business and pre-existing non-competes with senior executives. The rule implicates unsettled questions regarding the FTC's authority to promulgate substantive competition regulations. Multiple lawsuits challenging the rule have been filed in federal district courts and others may follow.

Two pending U.S. district court cases to stay the rule are summarized below; unfortunately, they indicate there are mixed judicial opinions about the rule. Whether the rule will be put on hold before the September 4,2024 implementation deadline is still TBD. We could see an injunction with nationwide effects in the ATS case as soon as August 30.

U.S. District Court for the Northern District of Texas

On July 3, 2024, in Ryan v. Federal Trade Commission, a district court in the Northern District of Texas preliminarily enjoined the implementation and enforcement against the plaintiff and plaintiffs-intervenors of their case against the Federal Trade Commission's (FTC) rule banning noncompete agreements. The court also stayed the rule's September 4, 2024 effective date for the plaintiff , declining to enter a universal injunction or to extend the injunction to members of the plaintiff-intervenor business associations. Business trade associations joining the case as plaintiff parties include the U.S. Chamber of Commerce, the Business Roundtable, the Texas Association of Business, and the Longview Chamber of Commerce.

While declining to issue a nationwide injunction, Judge Ada Brown signaled a likely intent to uphold the challenge to the non-compete ban in a future ruling based on her finding that the FTC had likely exceeded its statutory authority and a categorical ban on non-competes would be arbitrary and capricious.

The court noted that it intends to resolve the case, presumably including the scope of relief, on the merits by August 30, 2024. Options for scope of relief include limiting the ruling to the specific companies involved in the case, extending it to companies that are part of the lawsuit (like the Chamber of Commerce), or making the rule invalid nationwide.

U.S. District Court for the Eastern District of Pennsylvania

Employers must still remain in limbo, however, because of a competing legal decision in another U.S. district court.

On July 23, 2024 a federal judge in Pennsylvania rejected a tree-trimming company's plea to block implementation of the FTC's ban on noncompete agreements from taking effect on September 4, siding with the agency and diverging from the Texas court's decision earlier this month.

The plaintiff that filed the suit in the U.S. District Court for the Eastern District of Pennsylvania is ATS Tree Services, a tree-removal company. The company argued that they use noncompete agreements to "provide its employees with necessary and valuable specialized training while minimizing the risk that employees will leave and immediately use that specialized training and ATS's confidential information to benefit a competitor."

In her ruling in ATS Tree Services, LLC v. Federal Trade Commission, Judge Kelley Brisbon Hodge said that ATS had not demonstrated that it would suffer irreparable harm from implementing the rule. Denying the company's motion for a preliminary injunction, she said the lawsuit was unlikely to ultimately prevail on the merits.

The ruling sides with the FTC, creating a divide in the judiciary on the scope of the FTC's regulatory powers and the legality of the FTC's upcoming non-compete ban.

What Happens Next

While the Pennsylvania judge's decision provides a chance of survival for the FTC non-compete rule, the FTC's win may be short-lived. By August 30, the Texas judge intends to rule on the ultimate merits of the challenge to the non-compete ban, at which time she could issue a more expansive, nationwide injunction. It is expected that the divided ruling on enjoining the noncompete rule could spur additional legal challenges by employers.

The rule's validity is thus likely headed to the U.S. Court of Appeals for the Third and Fifth Circuits on similar timelines. Although the district court in Ryanissued a preliminary injunction only as to the challengers before the court, Fifth Circuit precedent makes clear that the usual relief for unlawful agency rules under the APA, 5 U.S.C. § 706, is vacatur, which invalidates the rule in all its applications, no matter the party.

Additionally, legal briefing is underway in a third challenge to the non-compete ban filed in Florida (Villages, Inc. v. Federal Trade Commission).

The Supreme Court's recent decision to end Chevron deference i.e. to limit the broad regulatory power of federal agencies, could raise the agency's legal hurdles in these cases. Both the district courts and appellate courts must approach the question of whether the FTC has authority to issue the non compete without deference to the agency's reading of the statute.

Next Steps

Given the uncertainty of the noncompete rule's future, agenciesshould consult with legal counsel about their options and the appropriate steps and contingencies to explore in the interim.

Have questions about the FTC noncompete rule or its associated ongoing litigation? Please contact Amanda Anderson, 4A's VP of Government Relations.

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