As we previously reported, here, the Federal Trade Commission (FTC) issued a Final Rule on April 23, 2024 that would prevent most employers from enforcing non-compete agreements against workers, effective September 4, 2024 (the “Rule”). As a result of a preliminary injunction entered against the Rule by a Texas federal court, employers are in limbo as to whether the Rule will impact their businesses.

The same day the FTC issued its Rule, a tax consulting firm based in Texas, Ryan LLC, sued the FTC in U.S. District Court for the Northern District of Texas challenging the FTC’s authority to issue such a rule. The United States Chamber of Commerce and others intervened as plaintiffs. A related lawsuit was filed in the Eastern District of Texas federal court the next day, but that lawsuit was stayed based on the earlier filing in the Northern District. 

On the eve of Independence Day, July 3, 2024, Judge Ada Brown of the Northern District of Texas issued a stay and a preliminary injunction against the FTC, halting implementation of the Rule. The Judge wrote in her order that the plaintiffs “are likely to succeed on the merits that the FTC lacks statutory authority to promulgate the Non-Compete Rule, and that the Rule is arbitrary and capricious.” Judge Brown declined to issue a nationwide preliminary injunction, limiting the order to the named plaintiffs, but stated that such injunctive relief “serves the public interest.”

The Judge further agreed with the plaintiffs that compliance with the Rule would cause them to suffer non-recoverable costs, including increased risk that departing workers may take the company’s intellectual property and proprietary methods to its competitors, which cannot be effectively mitigated by trade secret laws and non-disclosure agreements. Further, companies would have to expend significant time and resources to counteract the Rule and update all existing agreements.

Judge Brown expects to issue a final decision on the merits of the lawsuit by August 30, 2024, which, based on the reasoning in her preliminary injunction, is expected to permanently enjoin the FTC from implementing the Rule, at least as it pertains to the named plaintiffs. In a similar lawsuit against the FTC, pending in the U.S. District Court for the Eastern District of Pennsylvania, the court’s decision regarding the request for a preliminary injunction against the Rule is expected by July 23, 2024. 

Notably, Judge Brown’s order comes just days after the U.S. Supreme Court’s opinion in Loper Bright Enterprises v. Raimondo, striking down the 40-year old precedent of “Chevron deference” under which courts deferred to agency interpretations of ambiguous statutory language. The Supreme Court ruling expands the courts’ authority to independently interpret statutes without deference to the administrative agencies that enforce them. Given that Judge Brown’s final ruling likely hinges on her interpretation of the FTC’s statutory authority to issue the Rule, Loper Bright would seem to support a permanent injunction against the Rule. 

With the September 4, 2024 nationwide effective date for the Rule approaching, employers are currently left with uncertainty as to the potential impact the Rule will have on them, as well as the possibility that the Pennsylvania court could rule differently than the Texas court.

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