Aug. 21, 2024 Update

As discussed further below, the Federal Trade Commission (FTC) recently issued a new rule that — if implemented — would ban virtually all noncompete agreements covering workers in the United States beginning Sept. 4, 2024.

Unsurprisingly, the rule was immediately challenged in multiple federal courts. And, on Aug. 20, 2024, Judge Ada Brown of the U.S. District Court for the Northern District of Texas, in Ryan LLC v. Federal Trade Commission, 3:24-cv-986, issued a broad ruling prohibiting the FTC from enforcing its noncompete rule anywhere in the country. Judge Brown had previously issued a preliminary injunction on July 3, 2024, prohibiting the FTC from enforcing the rule, but only with respect to the named plaintiffs involved in the Ryan LLC litigation. Judge Brown preliminarily enjoined the FTC rule after concluding that (1) the FTC had exceeded its statutory authority under the Federal Trade Commission Act; and (2) the FTC’s actions were arbitrary and capricious under the Administrative Procedures Act. The rationale for Judge Brown’s Aug. 20 decision largely tracks that of the July 3 decision, but the more recent decision is more significant than the preliminary decision in two respects. First, the Aug. 20 decision constitutes a final decision on the merits of the plaintiffs’ challenge to the noncompete rule, setting up a possible appeal by the FTC to the United States Court of Appeals for the Fifth Circuit. Second, the Aug. 20 decision expands the scope of the court’s injunction to prohibit the FTC from enforcing its noncompete rule anywhere in the country — unless and until a higher court vacates Judge Brown’s decision.

Taft attorneys will update this webpage periodically as warranted by new developments. For additional background and context regarding the various challenges to the FTC noncompete rule, see Taft’s prior updates on this topic below.

Aug. 16, 2024 Update

Ryan LLC (Northern District of Texas)

On July 3, 2024, a judge of the U.S. District Court for the Northern District of Texas held in Ryan LLC v. Federal Trade Commission, 3:24-cv-986, that the FTC likely exceeded its statutory authority in promulgating such a sweeping, national ban on noncompete agreements. The court’s decision does not apply beyond the plaintiffs to that lawsuit, but it does cast serious doubt about the FTC’s authority and ability to enforce the rule.

Ryan LLC consolidates challenges to the FTC rule brought by a tax services firm and several business groups the court permitted to intervene after they filed a similar lawsuit in the Eastern District of Texas. Collectively, these plaintiffs argued that the FTC’s actions in issuing the rule were unlawful for four reasons: (1) the FTC exceeded its statutory authority under the Federal Trade Commission Act (FTCA); (2) the FTC’s actions were arbitrary and capricious under the Administrative Procedures Act (APA); (3) the structure of the FTC is unconstitutional; and (4) the FTC’s interpretation of the FTCA, if accepted, would involve an unconstitutional delegation of legislative authority to the FTC. The plaintiffs requested preliminary and permanent injunctions to prevent the FTC from enforcing the rule.

In granting the plaintiffs’ request for a preliminary injunction prohibiting the FTC from enforcing the rule against the Ryan LLC plaintiffs, the court held that the plaintiffs had shown a likelihood of success on the merits with respect to their statutory arguments under the FTCA and the APA. With respect to the FTCA, the court held that the FTC likely lacks the authority to issue substantive rules — as opposed to interpretive or procedural rules. With respect to the APA, the court held that the FTC’s actions were likely arbitrary and capricious. Among other criticisms, the court faulted the FTC for failing to identify evidence that would support such a broad, categorical ban on noncompete agreements, failing to consider the positive benefits of noncompete agreements, and failing to adequately address less disruptive alternatives. The court declined to decide the plaintiffs’ constitutional arguments, explaining that it was unnecessary to do so given its finding that plaintiffs were likely to succeed on their statutory arguments. The court also indicated that it intended to issue a decision on the merits of the plaintiffs’ requests for a permanent injunction by the end of August 2024. No such decision has yet been issued, but it is expected before Aug. 30.

Notably, the court declined the plaintiffs’ request for a nationwide injunction precluding the FTC from enforcing the rule against employers who were not involved in the Ryan LLC lawsuit. The court also declined to extend its ruling to the members of the business groups that were allowed to intervene in the lawsuit. As such, this ruling did not alter the obligation of most employers to comply with the FTC rule.

ATS Tree Services, LLC (Eastern District of Pennsylvania)

In the wake of the ruling in Ryan, LLC — and in stark contrast to it — a federal district court in Pennsylvania ruled in ATS Tree Services, LLC v. Federal Trade Commission, 2:23-cv-01743-KBH that the FTC likely acted within its proper statutory authority when it enacted the near total ban on noncompete agreements. Based on this interpretation, the Pennsylvania court, unlike the court in Texas, refused to enjoin the FTC rule from taking effect, even for the parties to the lawsuit.

The Pennsylvania ruling directly conflicts with the ruling out of Texas — the former upholding the FTC’s authority to issue the ban, and the latter invalidating the rule but refusing to provide a nationwide remedy. Though these rulings are preliminary, their conflicting analyses signal that the FTC rule may be interpreted and implemented differently depending on where it is enforced.

Properties of the Villages Inc. (Middle District of Florida)

On Aug. 14, 2024, a judge in the U.S. District Court for the Middle District of Florida ruled on another motion to temporarily stall the enforcement of the FTC rule. In Properties of the Villages, Inc. v Federal Trade Commission, 5:24-cv-316-TJC-PRL, the Florida court granted the plaintiffs’ motion for a preliminary injunction, staying the enforcement of the FTC rule as to the plaintiffs in that lawsuit. The Florida court, like the Texas court in Ryan, LLC, did not enjoin the FTC rule nationwide.

Though the court in Properties of the Villages issued the same bottom-line ruling as the Texas court in Ryan, LLC, it is worth noting that the court cited a different basis for doing so. The Florida court ruled that the FTC rule should be enjoined because it violates the “major questions doctrine.” In other words, the FTC rule implicates a major question that affects a significant portion of the economy and that, historically, has fallen under the purview of state law. Accordingly, the FTC needed clear congressional permission to issue this rule.

What’s next?

On this page, Taft’s attorneys will continue to provide further updates regarding any successful challenges to the FTC’s rule as they occur. Although the ultimate fate of the rule is not yet known, the preliminary injunction decisions from the Northern District of Texas and the Middle District of Florida cast serious doubt on the FTC’s authority to enforce the rule. Even so, the rulings in those cases do not extend to employers outside the plaintiffs in those lawsuits. Employers should continue to monitor the rulings in the pending lawsuits, in particular the ruling in Ryan LLC, which is expected to be issued before the end of August.

The conflicting outcomes of the decisions discussed above reinforce what has historically been true — that the enforceability of noncompete agreements requires a holistic analysis that takes into account the state laws and business interests at issue, among other considerations. For questions about a noncompete agreement, contact a Taft attorney or any attorney on the Employment Law team.

April 24, 2024 Update

Yesterday, the Federal Trade Commission (FTC) issued a new rule banning virtually all noncompete agreements covering workers in the United States. Absent a successful court challenge, the rule will go into effect 120 days after publication in the Federal Register (which is expected to happen shortly).

Under the new rule, and subject to a few narrow exceptions, companies are banned from entering into new noncompete agreements and enforcing noncompete agreements currently in effect with all workers.

The definition of “worker” is broad and includes not only employees but also independent contractors, externs, interns, volunteers, apprentices, or sole proprietors. The definition of “worker” does not include a franchisee in the context of a franchisee-franchisor relationship.

A noncompete agreement is defined as an agreement that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from (i) seeking or accepting work with another person after the end of employment or (ii) operating a business after the conclusion of employment.

The final rule provides that the use of noncompete agreements is an “unfair method of competition” that violates Section 5 of the FTC Act. Violations of the FTC Act can result in fines, penalties, and other injunctive relief.

Noncompete Recission and Notice Requirements

Existing noncompete agreements with workers other than senior executives will no longer be enforceable under the new rule (presuming it goes into effect). Employers will not be required to rescind these agreements, but will be required to notify affected workers that the agreements are no longer enforceable. The FTC has issued a model notice for this purpose.

The new rule allows existing noncompete agreements with senior executives to remain in effect. “Senior executive” is generally defined as an employee “earning more than $151,164 annually who [is] in a policy-making position.” These positions include an entity’s president, chief executive officer or the equivalent, or any other officer who has the authority to make policy decisions that control significant aspects of the business entity. However, companies can no longer enter into noncompete agreements with senior executives after the effective date of the final rule.

Exceptions

Noncompete agreements ancillary to the sale of a business remain permissible. In addition, the new rule does not prohibit an employer from pursuing a cause of action against a worker who violated their noncompete agreement prior to the effective date of the rule.

Because the FTC’s authority only extends to for-profit businesses, the final rule will not affect employment agreements entered into by workers employed by non-profit organizations. While the FTC recognizes this limitation, it has stated it reserves the right to evaluate an entity’s non-profit status.

Relations to Other State Laws

The final rule does not limit or affect the enforcement of state laws that already restrict noncompetes, so long as the law does not conflict with the final rule. The final rule only supersedes existing state laws where the state law conflicts with the final rule.

Takeaway for Employers 

During the 120 days before the final rule goes into effect, employers should identify all employees who have signed non-compete agreements, and of those employees, identify which qualify as “senior executives” under the rule.  Employers should identify those individuals to whom notices will need to be provided, but should not issue such notices until closer to the effective date.

It is anticipated that this final rule will be subject to numerous legal challenges. The U.S. Chamber of Commerce has already filed a lawsuit seeking to strike down this ban in the U.S. District Court for the Eastern District of Texas, Chamber of Commerce of the United States of America v. Federal Trade Commission. The U.S. Chamber of Commerce alleges that the FTC lacks the power and authority to unilaterally ban noncompete agreements and seeks injunctive relief from the court to prevent the implementation of the final rule. Additional lawsuits challenging the rules are expected to follow.

Unless and until a court issues a temporary restraining order or preliminary injunction that would delay the implementation of the final rule, employers should begin the process of planning for the impact of the ban. The final rule does not generally ban other restrictive covenants, such as confidentiality or non-disclosure agreements. Corporations concerned about protecting their intellectual assets should review their confidentiality agreements to ensure adequate protection and restructure their employment agreements to comply with the new rule.

Taft attorneys will continue to monitor these developments and are available to assist in evaluating the impact of this new rule.