The Rule is facing intensified legal challenges as its effective date is now less than 40 days away. Two different federal district courts have issued two different decisions on legal challenges to the Rule. In Ryan LLC v. Federal Trade Commission, a federal district court in Texas issued a limited preliminary injunction preventing enforcement of the Rule against the named plaintiffs in that case. However, when presented with the same legal arguments, a federal district court in Pennsylvania in ATS Tree Services, LLC v. Federal Trade Commission refused to issue any injunction to the plaintiff.

Texas District Court’s Decision

On July 3, 2024, in Ryan LLC v. Federal Trade Commission, the U.S. District Court for the Northern District of Texas issued a limited, preliminary injunction staying enforcement of the Rule against the named plaintiffs before the court.

In issuing an injunction, the Texas district court made four key findings. First, the Ryan court concluded that plaintiffs were likely to succeed on the merits that the FTC does not have the statutory authority to promulgate the Rule. Second, the Ryan court found there was a substantial likelihood that the Rule is arbitrary and capricious because the FTC provided no reason for the Rule’s broad application and “one-size-fits-all” approach with no end date. Third, the Ryan court held that the named plaintiffs would likely suffer irreparable harm if the Rule takes effect. Last, the Ryan court held that an injunction would serve the public interest in maintaining the status quo and preventing the substantial economic impact that would likely result if the Rule takes effect.

Importantly, the Ryan court declined to issue a nationwide injunction, limiting the scope of the injunctive relief to the named plaintiffs (including Ryan LLC, U.S. Chamber of Commerce, Business Roundtable, Texas Association of Business, and Longview Chamber of Commerce). For all other employers, the Rule will still take effect on September 4, 2024 unless halted by pending or subsequent legal challenges.

Although the preliminary injunction applies only to the Ryan plaintiffs, the Texas district court’s decision casts serious doubt as to whether the Rule will ever go into effect. The Ryan court is set to issue a final decision on the merits on August 30, 2024, just days before the Rule’s September 4 effective date.

Pennsylvania District Court’s Decision

On July 23, 2024, in ATS Tree Services, LLC v. FTC, the U.S. District Court for the Eastern District of Pennsylvania reached contrary conclusions than the Ryan decision. The Pennsylvania district court found that ATS failed to show immediate and irreparable harm to justify imposition of injunctive relief. The ATS court additionally addressed ATS’s likelihood of success on the merits and found that ATS was unlikely to prevail on its argument that the FTC does not have authority to promulgate the Noncompete Rule. The ATS court found that that the FTC has statutory authority to promulgate substantive rules as to unfair methods of competition.

The ATS decision, however, did not address the Texas district court’s decision in Ryan.

Other Legal Challenges

A third challenge to the Rule, Properties of the Villages v. Federal Trade Commission, No. 5:24-CV-00316 (June 21, 2024), is pending in the U.S. District Court for the Middle District of Florida.

Future Implications

In light of the Texas district court’s limited preliminary injunction and the Pennsylvania district court’s refusal to issue any injunction, it seems that a nationwide injunction is unlikely to come from a federal district court. It is highly likely that the losing party in any of the pending challenges would appeal, especially in light of the Ryan and ATS courts’ contrasting preliminary rulings. The dispute will likely ascend to the Third and Fifth Circuits, respectively, setting up a potential circuit split that will likely be reviewed by the U.S. Supreme Court in the coming months. Furthermore, given the U.S. Supreme Court is on summer recess until October, any injunction the U.S. Supreme Court may issue will come after the Rule takes effect.

Right now, the Rule is still scheduled to become effective on September 4, 2024. Employers should continue to take steps to prepare for compliance, including, at a minimum, auditing agreements containing non-compete provisions, and working with counsel to prepare and ready notices required by the Rule. Employers should also consider alternative options that can adequately protect their interests, such as non-solicitation agreements, non-disclosure agreements, invention protection, training repayment programs, garden leaves, and non-competition agreements entered into in connection with sales of businesses.

*Written with the assistance of Alexis Cashman and Ann Van Hout, summer associates at Husch Blackwell’s Milwaukee office.

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