On April 23, 2024, the Federal Trade Commission (the “FTC”) issued a rule banning most post-employment non-competition agreements (the “FTC Rule”). Since its promulgation, the FTC Rule has been subject to legal challenges. On July 3, 2024, Judge Ada Brown of the United States District Court for the Northern District of Texas issued a preliminary injunction in the case of Ryan, LLC v. Federal Trade Commission, in which the court enjoined the FTC from implementing or enforcing the FTC Rule. Judge Brown’s order is subject to two important qualifications. First, it is subject to further adjudication, with a final order on the merits expected to be issued by August 30, 2024. Second, it applies only to the plaintiffs in the Ryan case. At least for now, the FTC Rule remains scheduled to become effective for all employers other than those in the Ryan case on September 4, 2024.
This client alert summarizes the court’s decision and addresses alternatives for employers during this period of uncertainty about the ultimate fate of the FTC Rule.
Key Provisions of FTC Rule
The FTC Rule is summarized in an earlier client alert, linked here. The FTC Rule is scheduled to go into effect on September 4, 2024. By the effective date, employers subject to FTC jurisdiction (which consist of the vast majority of businesses) are required by the FTC Rule to issue notices to employees and other workers with agreements that prohibit competition after employment or other engagement ends (referred to in the FTC Rule as “non-compete clauses”) stating that such clauses will not be and cannot be enforced. Specifically, subject to its effectiveness, the FTC Rule will also bar covered employers from (1) entering into non-compete clauses; (2) enforcing or attempting to enforce non-compete clauses; or (3) representing that an employee or other worker is subject to a non-compete clause. The FTC Rule includes some narrow exceptions, including for non-compete clauses that are currently in place with employees in “policy-making positions” who earn more than $151,164 per year and non-compete clauses entered into pursuant to certain bona fide business transactions.
Litigation Concerning the FTC Rule
As noted in Goodwin’s earlier client alert, shortly following the issuance of the FTC Rule, two lawsuits were filed against the FTC. The Ryan case is the first to address a request for a preliminary injunction to bar enforcement of the FTC Rule. Another case, ATS Tree Services, LLC v. Federal Trade Commission, was filed in the United States District Court for the Eastern District of Pennsylvania. A motion for a preliminary injunction is pending in ATS Tree Services, with a decision on that motion expected to be issued on July 23, 2024.
Motion for Preliminary Injunction Before the Ryan Court
The plaintiffs in Ryan consist of Ryan, LLC, a tax services firm based in Dallas, Texas, the U.S. Chamber of Commerce, Business Roundtable and two Texas-based trade associations. Soon after the litigation commenced, Ryan, LLC filed a motion for a preliminary injunction to stay the effective date of the FTC Rule, which was joined by the other plaintiffs.
To obtain a preliminary injunction, the plaintiffs needed to show that (1) they had a substantial likelihood of prevailing on the merits of the dispute with the FTC; (2) there was a substantial threat of irreparable harm in the absence of injunctive relief; (3) the balance of equities weighed in favor of the plaintiffs; and (4) issuing the injunction served the public interest. The court in Ryan concluded that the plaintiffs satisfied each of these requirements.
First, the court concluded that the plaintiffs were likely to prevail on the merits of the dispute. The FTC argued that it had authority to issue the FTC Rule under the Federal Trade Commission Act (the “FTC Act”) to engage in substantive rulemaking concerning what constitute “unfair methods of competition.” Based on its analysis of the text and the history of the FTC Act, among other considerations, the court concluded that the FTC did not have authority to promulgate substantive regulations concerning unfair methods of competition. Although that alone would have been a sufficient basis to conclude that the plaintiffs were likely to prevail on the merits, the court went on to conclude that the FTC Rule was “arbitrary and capricious,” and therefore unenforceable for that reason as well, because there was insufficient evidence to support a ban as sweeping as the FTC Rule and because the FTC had not adequately considered alternatives.
Second, the court concluded that irreparable harm would result if a preliminary injunction were not issued, based on the “nonrecoverable costs” of complying with the FTC Rule, noting that the plaintiffs had identified costs of such compliance, including the loss of non-competes for which they had bargained and the loss of confidential information that was no longer protected through a non-compete.
Third, the court observed that non-compete agreements have been found by courts to be in the public interest and that preserving them would merely preserve the status quo. It concluded that both the balance of equities and the public interest factors therefore favored issuing a preliminary injunction.
Limited Scope of Preliminary Injunction in Ryan Case
While the court concluded that the circumstances warranted issuance of a preliminary injunction, it limited the scope of the injunction to the plaintiffs in the case. The court rejected the plaintiffs’ argument that the injunction should be nationwide in scope, concluding that the standards for issuing a nationwide injunction had not been satisfied. Instead, the court limited the injunction to preventing implementation and enforcement with respect to the plaintiffs in the litigation—Ryan, LLC, the U.S. Chamber of Commerce, Business Roundtable and the local trade associations. The court also held that the business groups had not sufficiently addressed the criteria necessary to show that their members should equally benefit from the ruling because they had not, at least in their initial motion and supporting briefs, established that they met the necessary elements of “associational standing,” that is, the right to pursue relief for their members.
Future Proceedings in Ryan and ATS Tree Services Litigation
The court issued orders concerning future proceedings, to culminate in “a merits disposition on this action on or before August 30, 2024.” In other words, the court plans to enter a final decision on the merits shortly before the FTC Rule’s originally scheduled effective date of September 4, 2024. In the meantime, the business groups will presumably develop their arguments to support associational standing and perhaps seek to have the court revisit the subject of a nationwide injunction. A ruling that the national business groups have associational standing could well be argued to support expanding the scope of the injunction beyond those members to have nationwide effect.
For its part, the FTC is expected to attempt to persuade the court to change its conclusions that led to its decision that the plaintiffs were likely to succeed on the merits. While not expressly addressed in the recent decision in Ryan, the Supreme Court’s rejection of “Chevron deference” in its June 28, 2024 decision in Loper Bright Enterprises v. Raimondo will likely create further challenges for the FTC in seeking to avoid a permanent injunction at the merits stage.
In the meantime, a decision will be issued on the motion for a preliminary injunction in the ATS Tree Services case. The court in ATS Tree Services may reach the same or different conclusions than the court in Ryan.
Consequences for Employers
Although the preliminary injunction in Ryan does not directly provide relief from the FTC Rule to any employers other than the plaintiffs in that case, the decision is a significant development, which employers can take into account in deciding how to proceed with respect to their agreements with non-compete clauses. For the time being, the FTC Rule is not in effect, which means that at least for now, employers that currently require post-employment noncompete agreements as a condition of employment and/or severance pay may continue to require such agreements, at least until the FTC Rule takes effect, if that happens.
For so long as there is uncertainty about whether the FTC Rule will take effect and be enforceable, employers will need to decide not only whether to continue their current practices concerning requiring non-compete clauses, but also whether to issue notices to employees and other workers with non-compete clauses stating that such clauses will not be and cannot be enforced. Under the FTC Rule, the deadline for issuing such notices is the effective date of the FTC Rule—currently September 4, 2024.
Some employers may decide to prepare such notices so that they can be in a position to issue them if the FTC Rule remains scheduled to take effect on September 4, 2024. However, employers that decide to take this step could hold off until at least September 3, 2024, the day before the FTC Rule becomes effective, before issuing such notices, as there may be further developments that postpone or permanently stay the effective date between now and then.
Possible Future Developments Before the Scheduled Effective Date
No doubt, the court in Ryan was fully cognizant of the Wednesday, September 4 effective date when establishing Friday, August 30 as the projected date for a decision on the merits. Among other possibilities, the Ryan court could not only issue a decision on the merits permanently staying the effectiveness of the FTC Rule with respect to the plaintiffs, but it could also consider new briefing on the associational standing issue. If an employer is a member of one of the associations that is a plaintiff in Ryan, a decision extending associational standing to those associations combined with a permanent injunction for their members would provide relief from the FTC Rule for those members. Indeed, a decision to provide relief for the many members of those associations could be a consideration in a further review of whether to issue a nationwide injunction.
Actions outside the Ryan litigation may also affect future obligations. The court in ATS Tree Services may issue a decision on the pending motion for a preliminary injunction that is broader than the one in Ryan or it may issue a contrary decision. Either court’s decision may be appealed on an expedited basis, leading to a decision of broader reach, and potentially one that the Supreme Court decides to review. Moreover, if the legal status of the FTC Rule remains uncertain, the FTC could decide on its own initiative to postpone any enforcement until the status is clarified.
Considerations for Employers if the FTC Rule’s Enforceability Is Not Clarified by the Effective Date
While any of the possible developments above could provide greater clarity, there is also the possibility that uncertainty will continue until and well beyond September 3, 2024. If so, employers will need to balance the risks of a dispute with the FTC over a rule of questionable enforceability with the harm they will face if they issue notices to employees voiding their existing non-compete clauses.
As explained in our original client alert on the FTC Rule, linked here, only the FTC could seek enforcement of the FTC Rule, since no private right of action is available to an employee under the FTC Act. The FTC’s options for enforcement are limited. It could seek an injunction under Section 13(b) of the FTC Act, but even if the FTC were successful, that would presumably be limited to an order that would require an employer to comply with the FTC Act by issuing the notices and refraining from enforcing non-compete clauses.
Alternatively, the FTC could utilize the procedures under Section 5(b) of the FTC Act. That provision authorizes the FTC to issue cease-and-desist orders in response to the use of any “unfair method of competition,” but only after completion of internal adjudicative proceedings. A cease-and-desist order would simply require compliance with the FTC Rule. If the order becomes “final” and the employer violates it, then civil penalties could be imposed for violations on a going-forward basis, but not based on the employer’s non-compliance before the order became final. Furthermore, such an order would not automatically become final after issuance. The employer could appeal the order directly to a federal court of appeals and ask the court of appeals to preclude the order from becoming final unless and until the FTC were to prevail on appeal.
Therefore, if the fate of the FTC Rule remains uncertain as of September 3, an employer could consider the option of continuing its practices with respect to non-compete clauses and refraining from issuing notices, at least until the enforceability of the FTC Rule becomes clearer. The employer would face the risk of enforcement proceedings by the FTC in the interim, but even if the FTC were to pursue such proceedings and issue a cease-and-desist order, the employer could avoid any sanctions by ultimately complying with a final FTC order.
Significant Implications for Future FTC Substantive Rulemaking
As noted above, Judge Brown’s decision that the plaintiffs were likely to succeed on the merits was based in part on her conclusion that the FTC did not have authority to promulgate substantive regulations concerning unfair methods of competition. Judge Brown found that a “plain reading” of Section 5 of the FTC Act does not expressly grant the FTC the authority to promulgate substantive rules regarding unfair methods of competition. She stated that the statutory language of Section 5 of the FTC Act and Section 6(g), which were cited by the FTC to support its claim of substantive rulemaking authority, made it akin to a “housekeeping statute” allowing only for the implementation of procedural rules concerning unfair methods of competition. Based on the text, structure, and history of the law, Judge Brown held that the FTC “lacks substantive rulemaking authority with respect to unfair methods of competition . . . .”
Judge Brown’s ruling, should it survive appeal, would constitute a major blow to the FTC’s continued efforts to step up enforcement against purported unfair methods of competition under Section 5 of the FTC Act, which the agency has previously stated gives it expansive powers to engage in substantive rulemaking, as discussed in an earlier Goodwin client alert, linked here. As discussed above, the Supreme Court’s decision in Loper Bright overturning the Chevron doctrine and ending federal court deference to agency statutory interpretations creates further challenges to the FTC’s efforts to expand the scope of the prohibition on unfair methods of competition through rulemaking.
Conclusion
The enforceability of the FTC Rule is subject to multiple possible future developments in the coming weeks. Those developments could affect employers’ decisions about whether to issue notices pursuant to the FTC Rule and whether to enter into and attempt to enforce non-compete clauses.
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