The Federal Trade Commission (FTC) is seeking to ban nearly all employee non-compete agreements in the United States [see April 25, 2024 Alert]. Almost immediately after the FTC issued its final rule, lawsuits challenging that attempt were filed in several courts around the country. On July 3, 2024, the first court ruling in those lawsuits held, on a preliminary basis, that the FTC likely did not have the authority to issue such a sweeping rule [see July 10, 2024 Alert]. The United States District Court for the Northern District of Texas held that the FTC’s enabling statute did not authorize it to issue substantive rules to prevent “unfair methods of competition” but rather only allowed the FTC to make substantive rules about “unfair or deceptive acts or practices.” Because the FTC declared that non-competes fell into the former category rather than the latter, the Texas Court determined, the FTC lacked the authority to issue the regulation.
Less than three weeks later, however, another federal court held, again on a preliminary basis, that the FTC likely did have the authority to ban all employee non-compete agreements. The United States District Court for the Eastern District of Pennsylvania considered a preliminary injunction motion brought by a tree care company with a dozen employees, each of whom had signed a non-compete agreement. The Court denied the employer’s request for a preliminary injunction on two grounds. First, the Court held that the company had not demonstrated irreparable harm in the absence of a preliminary injunction. Second, and more interesting for purposes of discerning whether the ban will ever actually go into effect, the Court held that the FTC did indeed have the power under its statute to issue substantive rules regarding unfair methods of competition.
As the Pennsylvania Court explained, the core issue was “whether the FTC, under Sections 5 and 6 of the [Federal Trade Commission] Act, has the authority to promulgate substantive regulations like the [Non-Compete ban], or whether the FTC’s enforcement authority is limited to adjudication and strictly procedural rulemaking related to the adjudication process.” The Court began by noting that the FTC Act gave the FTC the power “to make rules and regulations for the purpose of carrying out the provisions of this subchapter,” 15 U.S.C. § 46(g). The Court observed that the statute did not distinguish between “procedural” and “substantive” regulations, and in fact mentioned neither term. The Pennsylvania Court stated that the plaintiff’s proposed interpretation of the FTC Act–the one that had been adopted three weeks earlier in the Texas case–“runs contrary to logic.” Further, the Pennsylvania Court determined that giving the FTC the power to “prevent” unfair methods of competition implies the power to issue substantive regulations in the area. Finally, the Pennsylvania Court declined to infer from the statute’s specific grant of authority to the FTC to issue rules for “unfair or deceptive acts” any limit to its ability to issue regulations related to “unfair methods of competition,” in large part because that section of the statute provides that it “shall not affect any authority of the Commission to prescribe rules (including interpretive rules), and general statements of policy, with respect to unfair methods of competition in or affecting commerce.”
So to switch from the boxing metaphor of our title to a baseball metaphor, after two innings the score is tied 1-1 with plenty of opportunities for both sides left in the game. We expect another preliminary ruling from a federal court in Florida soon, and the Texas Court has indicated that it will rule on the request for a final injunction by the end of August. Then, of course, the appeals will commence. Ultimately, it seems likely that the US Supreme Court will weigh in on the matter unless the political process stops the rule before it gets the chance. We expect several developments on this issue before the September 4, 2024, effective date of the non-compete rule, so stay tuned.
As we noted in our discussion of the Texas decision, the consequences of non-compliance with the FTC non-compete rule appear to be limited. The FTC has authority to seek civil penalties of up to $10,000 per violation in response to violations of its rules concerning unfair or deceptive acts or practices, but not with regard to unfair methods of competition. The non-compete rule is expressly based on the FTC’s finding that non-competes are an unfair method of competition. That (likely) means that even if the non-compete rule goes into effect, the FTC would not be able to impose civil penalties against an employer unless and until it first issues an administrative complaint, holds a hearing, issues a cease and desist order, and that order becomes final (meaning that the time to appeal expired or that all appeals have been exhausted). At that time, if the employer violated the final cease and desist order, the FTC could then file a lawsuit asking a court to award it civil penalties. Employers with non-compete agreements should discuss these issues with their attorneys in order to make the best decisions possible in this dynamic environment.
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