As previously reported, in late April, the Federal Trade Commission (FTC) unveiled a final regulatory rule that would invalidate and ban virtually all preexisting and future non-compete agreements in the U.S. Simply put, the rule, if it takes effect – which is currently scheduled to occur on September 4, 2024 though, as noted below, that might not come to pass – would represent the largest seismic shift ever in U.S. non-compete law.
Following publication of the rule in the Federal Register in early May, legal challenges were promptly filed in Texas and Pennsylvania Federal Courts (another challenge was filed in Florida federal court in June). Motions seeking to preliminarily enjoin the final rule from taking effect then ensued, with the petitioners in each case arguing, among other things, that the FTC lacks authority to issue substantive rules concerning non-compete agreements and, also, that the FTC did not sufficiently tailor the rule to the purpose/justification underlying it (by issuing an essentially blanket ban on non-competes).
The first jurist to weigh in was Judge Ada Brown of the U.S. District Court for Northern District of Texas, who issued a decision on July 3, 2024 concluding that "the text and the structure of the FTC Act reveal the FTC lacks substantive rulemaking authority with respect to unfair methods of competition. The court concludes the commission has exceeded its statutory authority in promulgating the noncompete rule, and thus plaintiffs are likely to succeed on the merits."
On this basis, the court issued a preliminary injunction staying enforcement of the final rule (though, notably, the court limited its decision to cover just the petitioning parties in the case, rather than issuing a nationwide injunction as had been requested). The court also noted that it intends to issue a decision regarding the ultimate merits of the case – i.e., the plaintiff's request for a permanent, nationwide injunction of the final rule – by August 30, 2024. Given the strong language in the court's decision, however, it appears a virtual lock that the ultimate ruling from Judge Brown will similarly conclude that the FTC exceeded the scope of its authority in issuing the non-compete rule.
Twenty days later, however, Judge Kelley Brisbon Hodge of the U.S. District Court for the Eastern District of Pennsylvania reached the opposite conclusion. In a 39-page decision issued on July 23, 2024, Judge Hodge found that, in addition to failing to show it would suffer irreparable harm should the rule go into effect, the petitioning business had failed to demonstrate that it was likely to eventually succeed on the merits of its argument – a necessary requirement for receiving a preliminary injunction – that the FTC lacks the authority to issue "procedural and substantive rules as is necessary to prevent unfair methods of competition."
According to Judge Hodge, the FTC Act does not limit the commission's rulemaking power to issuing "exclusively procedural rules." On the contrary, Judge Hodge concluded, the FTC has the power to issue substantive regulatory rules concerning the use of non-compete agreements by U.S. businesses. Noticeably, however, Judge Hodge did not mention, much less analyze, the Texas decision diametrically opposing her own ruling.
At present, therefore, there exists a judicial divide over the constitutionality of the FTC's final rule – though the Texas and Pennsylvania rulings are almost assuredly just the first step in the legal process. Appeals to the Fifth and Third Circuit Courts of Appeals, respectively, are likely to follow in short order, with the rule's ultimate fate likely destined to be decided by the U.S. Supreme Court. In the meantime, employers should continue to (i) build out compliance strategy plans in the event the non-compete ban does end up taking effect (whether on September 4, 2024 or at a later date) and (ii) consult with legal counsel in order to stay abreast of developments on this front.
This article is presented for informational purposes only and is not intended to constitute legal advice.