As we dive into the Ryan, LLC v. FTC decision, Jason and Adam examine what an appeal to the Fifth Circuit may look like, highlighting that the plaintiffs made a number of arguments as to the invalidity of the FTC non-compete rule that the district court did not reach. They discuss how those arguments are still at play in the Fifth Circuit, which could affirm the district court on any grounds that were argued, and doesn't necessarily have to agree with the same ones that the district judge ruled upon.

Transcript

Jason Tompkins:
Welcome to Balch's Decision Dive. I'm Jason Tompkins, chair of the firm's Issues and Appeals practice, and today I'm joined by Adam Israel, member of the Litigation Practice. Typically, on Decision Dive, we discuss brand new appellate rulings that affect various industries. Today is a little bit different. We're going to discuss a trial court ruling that will no doubt end up on appeal very soon. And that is the case of Ryan LLC v. FTC of the Northern District of Texas, in which the Court struck down the FTC's non-compete ban. So Adam, what's the key takeaway for businesses that use non-compete agreements after this ruling?

Adam Israel:
For the time being, the good news is the pressure is off. So, if businesses were getting ready to comply with that notice deadline of September 4th, they can dial that back right now. They don't have any current deadline that they have to comply with. They should continue to monitor the litigation as it moves through the courts, because you never know what an appellate court is going to do, and they may put the applicability of the rule right back in play, and businesses may be put in the situation of having to comply sometime down the road. So, they need to stay vigilant, and stay tuned, and pay attention to what's going on. In the meantime, it's still very important to be aware of what is going on on the state level and make sure that your non-compete agreements and other restrictive covenants are compliant with applicable state law.

Jason Tompkins:
By way of background, can you tell us a little bit about the FTC's non-compete ban that was at issue in this case?

Adam Israel:
Sure. About January of last year, 2023, the FTC proposed a rule that would essentially ban all non-competes within the United States. That rule went through a notice and comment period during the rest of the year. And earlier this year in April, the FTC finalized that rule, and that was published in the Federal Register. The rule would essentially have outlawed all new non-competes going forward, so no companies, with few minor exceptions, could enter into new non-competes with their employees. And it also prohibited them from enforcing old non-competes with most of their employees. Pretty much immediately there were legal challenges to that rule. And so, we've been in a period of litigation since early... Excuse me, since late April.

Jason Tompkins:
What types of industries are affected by the FTC's non-compete rule?

Adam Israel:
The FTC itself said in the rule that about one in five Americans were subject to non-competes, and so it estimated about 30 million Americans were subject to such agreements. So, it affected virtually every industry in the country, from sales, to software, to industrial, everybody was affected.

Jason Tompkins:
And that non-compete rule was slated to go into effect in just a couple of weeks, on September 4th, I think. But, yesterday's ruling from the Northern District of Texas invalidated the FTC's non-compete rule entirely and said that it's no longer going to go into effect. What was the basis of the court's decision?

Adam Israel:
Sure. Yeah, that's correct. So, the rule was set to go into effect on September 4th. And I'll just say that previously the court had issued a preliminary injunction staying the enforceability of that rule, but only as to the named plaintiffs in that lawsuit. Yesterday's ruling invalidated the rule on a nationwide basis for everybody. And the basis for that ruling was that the rule that the FTC adopted had exceeded its statutory authority that was granted to it by the Federal Trade Commission Act that was passed back in 1914. Essentially, the Court said that the Federal Trade Commission doesn't have the authority to issue substantive rules like the one that it did. The court also held that even if the FTC had the authority to issue the rule that it did, that it didn't have a sufficient evidentiary basis for issuing the rule. And so, its action was arbitrary and capricious. So, it struck the rule down on two different bases. And so, that ruling was passed down yesterday, and that puts an end to that rule, at least for the time being for all employers nationwide.

Jason Tompkins:
And as I read the opinion, the Court seemed to draw a distinction between the FTC's authority to issue rules or regulations about unfair methods, but not necessarily about unfair practices, and perhaps gave some examples about the FTC's authority to regulate individual entities practices through enforcement actions, but maybe not industry-wide methods. Is that a distinction that's important as we go forward?

Adam Israel:
It's important for the FTC's authority generally. Here, the FTC attempted to outlaw all non-competes in a blanket manner as an unfair business method. And the Court essentially said Section 6(g) of the FTC Act doesn't give them the authority to make such sweeping rules. They could still potentially take individual actions on a case by case basis to challenge the enforcement of specific non-compete provisions as an unfair business act or unfair business practice. But, as a practical matter, the FTC doesn't have the resources to really make much of a difference in that regard on a national scale.

Jason Tompkins:
Just because the Court struck down the FTC's non-compete rule doesn't mean that companies are just free to contract with their employees any way they want. Correct? As I read the FTC's rule, they recognize that at least 46 states have their own non-compete rules.

Adam Israel:
Yeah, that's absolutely correct. So historically, non-compete have been governed... They're a creature of contract and they've been governed by state law because they're contractually based. And various states have a patchwork of different regulations regarding the enforceability of non-compete. Some states take the position that they're completely unenforceable in their states, others say they're enforceable under certain circumstances. So, it's always very important to consult your lawyer to determine what state's law is going to govern the non-competed issue and to determine whether the covenant you have is going to be enforceable under the circumstances of that specific case.

Jason Tompkins:
The court's ruling in Ryan LLC was a final judgment resolving all claims at issue, which means now the Federal Trade Commission can appeal within the next 60 days. What is the appellate process from here, and are there any other cases in the country that might be on the similar track?

Adam Israel:
Yeah. So, there are three cases in the country at various stages of litigation. The Ryan case is the furthest along. There's another case in the Eastern District of Pennsylvania called the ATS Tree Services case. In that case, the court actually denied the requested injunction, and so it would've allowed the rule to actually go into effect. The other case is pending in the Middle District of Florida, and it is the Properties of the Villages case. Last week, the court issued an injunction in that case preventing the rule from going into effect as to the named plaintiffs in that case as well.
It ruled on a different basis than the Ryan case. In that case, the court based decision on the major questions doctrine. But, that ruling was just issued last week. So, it's not as far along in the process as the Ryan LLC case. From here, if the FTC decides that it's going to appeal, which I would assume that it would, it would appeal to the Fifth Circuit Court of Appeals, and the Fifth Circuit would take that rule up and make its determination. It may do so on an expedited basis or it could let it run the normal course of an appellate proceeding.
And then from there, the next stop, if the court decides to take it, would be to the United States Supreme Court to resolve the question of whether the FTC has the authority to issue the rule that it did.

Jason Tompkins:
And, I think, significantly for the appeal to the Fifth Circuit as the next step, there were a number of arguments that the district court did not reach that the plaintiffs made as to the invalidity of the FTC non-compete rule. All of those are still at play in the Fifth Circuit, because the Fifth Circuit could affirm the district court on any grounds that were argued, and doesn't necessarily have to agree with the same ones that the district judge ruled upon.

Adam Israel:
Yeah, that's correct. So for example, the plaintiffs in that case made arguments that the FTC's action not only exceeded its statutory authority, but were also unconstitutional. The court didn't reach those questions, because it determined that it didn't have the statutory authority to issue the rule that it did. If the Fifth Circuit disagrees with the district court and says it did have the statutory authority to issue the rules, it could still rule in favor of the plaintiffs on those constitutional grounds as well.