The contentious debate on the enforcement of the FTC's Rule banning noncompete agreements nationwide (the Rule) continued this past week, with the latest development being a ruling in the U.S. District Court for the Eastern District of Pennsylvania related to a challenge to the FTC's Rule. In ATS Tree Services, LLC v. FTC, et al., Judge Kelley Hodge denied plaintiff ATS's motion for a stay of the effective date of the Rule and its request for a preliminary injunction blocking the Rule.
This decision was issued on July 23, 2024, a few weeks after Judge Ada Brown of the U.S. District Court for the Northern District of Texas issued an Opinion and Order in Ryan, LLC v. FTC granting Ryan LLC and plaintiff-intervenors' – the U.S. Chamber of Commerce, et al. – preliminary injunction against the FTC to prevent the enforcement of the Rule. The Rule that provides for a nationwide ban of noncompetes is set to take effect on September 4, 2024.
Anatomy of Diverging Decisions
With the respective preliminary injunctions to prevent the enforcement of the FTC Rule, Judge Brown and Judge Hodge's decisions considered similar issues. However, the judges ultimately reached entirely different conclusions. Particularly, the judges had divergent opinions when analyzing the likelihood of success in challenging the Rule and whether there would be irreparable harm in the enforcement of the Rule.
When considering whether there was a likelihood of success on the merits, both courts considered the respective plaintiffs' arguments that the FTC lacks statutory authority to issue rules defining unfair methods of competition. In the Ryan LLC decision, Judge Brown determined that the FTC has some authority to implement rules to preclude unfair methods of competition, but concluded that that authority did not extend to implementing substantive rules. Accordingly, Judge Brown found the FTC exceeded its statutory authority in implementing the Rule. Judge Brown determined that there is a substantial likelihood that the Rule is arbitrary and capricious because it is unreasonably overbroad without a reasonable explanation. She found that the Rule imposes a one-size-fits-all approach with no end date and the FTC failed to address alternatives to the Rule.
On the other hand, Judge Hodge in the ATS case determined that, when considering the FTC Act and its purpose, it is clear that the FTC has the authority to make procedural and substantive rules regarding unfair competition. Judge Hodge explained that Congress's use of the word "prevent" in the FTC Act means that the FTC was intended to prevent threats of unfair methods of competition.
When considering irreparable harm, for the most part, in both cases, the plaintiffs made similar arguments that, among other things, the Rule would cause the plaintiff to incur expenses in updating its agreements and providing notice for existing agreements, and the enforcement of the Rule would result in the risk that workers would depart with no restrictions on their use of proprietary information. With that argument, Judge Brown's decision determined that Ryan LLC demonstrated irreparable harm based on, among other things, the financial injury that the plaintiff and the plaintiff-intervenors would suffer in compliance with the FTC Rule.
Contrarily, Judge Hodge determined that there was no irreparable harm when considering ATS's argument based on, among other things, that nonrecoverable costs associated with compliance with a governmental rule is not considered irreparable harm. Of particular note, Judge Hodge made it clear that her district court in the Third Circuit does not follow the rule of the Fifth Circuit – that nonrecoverable costs associated with a government rule is irreparable harm – which is the circuit in which Judge Brown's decision was decided.
Analysis
Judge Brown's decision was issued before the final decision was published in Loper Bright Enters v. Raimondo, 144 S. Ct. 2244 (2024). Loper is the U.S. Supreme Court's decision that held courts are required to exercise their independent judgment in deciding whether an agency has acted within its statutory authority, and courts may not defer to an agency interpretation of the law simply because a statute is ambiguous. However, Judge Hodge in the ATS Tree Services decision referenced that decision when determining that the FTC Act provides the FTC with authority to implement its noncompete ban.
Of note, Judge Brown limited the preliminary injunction to the named plaintiff and plaintiff-intervenor. She declined the plaintiffs' request for a nationwide ban on the FTC rule because there was no briefing as to why nationwide injunctive relief is necessary to provide complete relief at the preliminary stage. This left open the door for this most recent decision by Judge Hodge, which denied the plaintiff's preliminary injunction to prevent the enforcement of the Rule. Judge Brown stated that she intends to issue a final substantive decision by August 30, 2024, which is right before the enforcement date of the Rule. However, given this new decision by Judge Hodge, it raises serious concerns as to whether Judge Brown's decision will be limited to the Fifth Circuit if she determines to invalidate the Rule.
Regardless of the court's final determination on the enforcement of the Rule, it is likely to be appealed. Therefore, we anticipate a lengthy legal battle over the future of noncompetes. Due to the uncertain future of noncompetes, employers should be proactive in reviewing and updating their employment agreements to carefully craft noncompetes in an effort to prevent the certain legal challenges to come.
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