On July 3, 2024, Judge Ada Brown of the Northern District of Texas dealt a significant blow to the efforts of the U.S. Federal Trade Commission (FTC) to prohibit employers from using or enforcing noncompete agreements with their workers.
In Ryan LLC v. FTC—a lawsuit brought by various companies and business groups, including the U.S. Chamber of Commerce—Judge Brown entered a preliminary order enjoining and staying the final noncompete rule issued by the FTC on April 23, 2024. The scope of the initial order in Ryan, however, only covers the plaintiffs in the lawsuit, and the court declined at this early stage either to enter a nationwide injunction or to stay the FTC’s rule as to all employers because, as the judge explained, the parties to the case had not focused their arguments on the question of nationwide relief. Judge Brown promised to enter a final judgment no later than August 30, 2024 after additional briefing from the U.S. Chamber and all other parties.
Nothing in this initial order prevents the FTC’s rule from taking effect for nearly all employers on September 4, 2024. Before that date, however, we anticipate that Judge Brown will provide additional clarity on the question of the injunction’s scope and impact on other employers who are not plaintiffs in Ryan. Other litigation currently pending in different federal courts may also result in a nationwide injunction or nationwide stay before September 4.
The FTC’s Rule
The FTC’s rule prohibits employers from entering or enforcing noncompete clauses with U.S. workers, with only limited exceptions. The commission’s action is unprecedented because this issue has never been comprehensively regulated by the federal government and has instead been left to the states. The rule bans noncompetes for the vast majority of U.S. workers by prohibiting companies from entering into new noncompete agreements with employees, independent contractors, or other workers.
The rule also invalidates most existing noncompete agreements and requires companies to provide notice to current and former employees that such agreements are invalid. Two observations from Judge Brown’s initial order are notable here. First, as the court explained, “States have historically regulated non-competes through caselaw and statute … [and] [n]o federal law broadly addresses the enforceability of non-competes.” Second, “no state has ever enacted a non-compete rule as broad as the FTC’s Non-Compete Rule.” Please see our April 23, 2024 advisory for more details on the rule.
Businesses and Associations Filed Multiple Lawsuits Challenging the FTC’s Rule
Lawsuits challenging the FTC’s rule commenced shortly after it was issued in April. Although Judge Brown’s July 3 order in Ryan is the first injunction issued, it may not be the last.
In Ryan, a Dallas-based tax firm filed suit to prevent the implementation and enforcement of the rule. The U.S. Chamber of Commerce, Business Roundtable, the Texas Association of Business, and the Longview Chamber of Commerce intervened to join Ryan as plaintiffs. The plaintiffs moved for a preliminary injunction to stay the effective date of the rule.
Judge Brown found that the plaintiffs satisfied all requirements and granted the preliminary injunction, including a likelihood of success on the merits. The court rejected the FTC’s argument that the agency has the authority to ban all noncompetes as “unfair methods of competition.” Instead, relying on “the text, structure, and history of the FTC Act,” the court found that the FTC did not have the authority to create “substantive rules” to preclude unfair methods of competition. The court also concluded that the FTC’s rule could be set aside as “arbitrary and capricious” due to the FTC’s lack of evidence to support the implementation of the noncompete ban and the FTC’s failure to adequately research alternatives to the noncompete ban.
Finding that “[t]he question to be answered is ‘not what the [FTC] thinks it should do but what Congress has said it can do,’” Judge Brown analyzed the statutory language and reached the following legal conclusion: “When considering the text [of the FTC Act], 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” of their lawsuit that seeks to strike down the rule.
The scope of the initial injunction in Ryan only applies, however, to the plaintiffs in the case, and Judge Brown rejected the request for a nationwide injunction. The court also held that the parties had not sufficiently briefed the issue of “associational standing” and, thus, the court declined to extend the preliminary injunction to members of the U.S. Chamber of Commerce and other business groups. On this point the court’s order reads like an invitation for additional briefing on that issue before its August 30, 2024 final order, and we anticipate further clarity on the associational standing issue in Ryan.
On July 10, 2024, the plaintiffs filed a motion requesting that the court convert its relief to a nationwide injunction and stay, or at least clarify that the injunction and stay covers employers that are members of the U.S. Chamber of Commerce and other associations who were plaintiffs in the case. We anticipate that the FTC will oppose this motion and the court will make a decision on this issue in the coming weeks.
A separate lawsuit, ATS Tree Services, LLC v. FTC, is pending in the Eastern District of Pennsylvania. The plaintiffs in that case also filed a motion for preliminary injunction, and a decision is expected to be issued by July 23, 2024. This case presents another opportunity for a U.S. district court to enjoin the FTC’s rule nationwide. Significantly, the Supreme Court’s recent decision in Loper Bright Enterprises v. Raimondo struck down the so-called Chevron doctrine that had required judges to give deference to administrative rules by federal agencies under some circumstances, which likely will result in even more close judicial scrutiny of the FTC’s authority to issue sweeping rules impacting large parts of the economy.
Considerations for Employers
We anticipate that additional litigation developments will significantly impact the FTC’s rule in advance of its September 4 implementation date. We will continue to closely monitor Ryan and similar lawsuits. The decisions in Ryan and Loper suggest that the rule’s path to actual implementation remains uncertain.
The recent decisions provide additional hurdles for the FTC’s ability to meaningfully enforce its rule even if it goes into effect on September 4 as to some or most employers. Since the FTC Act provides no private right of action, the FTC must enforce the rule by seeking an injunction or a cease-and-desist order and then seeking civil penalties or contempt penalties for an employer’s violation of such orders. Employers would thus have opportunities at that time to challenge the rule in court, using the same arguments that were successful in the Ryan decision as well as additional arguments under Loper.
As things stand in early July, there is significant doubt that the FTC’s rule will be permitted to take effect on September 4. There are also open questions about whether the rule would apply to certain businesses (banks, nonprofits, and others) even if it is permitted to take effect. We caution that regardless of the fate of the FTC’s general ban, the FTC has challenged—and may continue to challenge—certain noncompetes under existing law. For that reason, we recommend that employers seek advice of their counsel regarding what, if any, action they should be taking in advance of the scheduled September 4 effective date of the FTC’s rule.You can subscribe to future advisories and other Alston & Bird publications by completing our publications subscription form.