As we discussed in our previous post, the Federal Trade Commission ("FTC") issued a final rule aiming to ban all non-compete agreements nationwide, with few exceptions (the "Final Rule"). The Final Rule, which was set to become effective on September 4, 2024, would have applied broadly to employees and other individuals who typically fall outside of the employer-employee relationship, and would have prohibited non-competes and possibly other restrictive covenants. However, as discussed further below, the U.S. District Court for the Northern District of Texas has issued a nationwide injunction in Ryan, LLC v. FTC (No. 3:24-cv-00986) ("Ryan"), which prevents the Final Rule from taking effect or being enforced on September 4, 2024 or anytime thereafter.
1. The Final Rule Is Not So Final
The Supreme Court Overrules Chevron Deference
On June 28, 2024, the Supreme Court of the United States issued a decision in Loper Bright Enterprises v. Raimundo (No. 22-451) ("Loper Bright") that significantly weakened the FTC's position regarding its authority to promulgate the Final Rule. In Loper Bright, the Court held that under the federal Administrative Procedure Act ("APA"), which governs the process by which federal agencies develop and issue regulations, courts may not defer to a federal agency's interpretation of the law simply because a statute is ambiguous. Instead, courts must exercise their independent judgment in deciding whether a federal agency has acted within its statutory authority. The Loper Bright decision overruled a decades-long administrative law principle known as Chevron deference, which required courts to defer to a federal agency's reasonable interpretation of an ambiguous statute where Congress delegated the statute's administration to that agency. As discussed further below, on its face, the Federal Trade Commission Act of 1914 and subsequent amendments (the "Act"), which established the FTC and its powers, is not entirely clear on whether the FTC has the authority to promulgate the Final Rule. In the absence of Chevron deference, the FTC has faced increased judicial scrutiny and can no longer rely on its interpretation of the Act to justify its rulemaking authority, which made a successful legal challenge to the Final Rule more likely.
A (Foreseeable) Nationwide Injunction of the Final Rule
In Ryan, LLC v. FTC (No. 3:24-cv-00986) ("Ryan"), the plaintiffs requested an injunction of the Final Rule as to themselves and on a nationwide basis. In determining whether to grant the requested relief, the court reasoned: (1) that plaintiffs proved their likelihood of success on the merits (i.e., that the FTC exceeded its statutory authority when issuing the Final Rule, and that the Final Rule is "arbitrary and capricious" under the APA); (2) that plaintiffs demonstrated irreparable harm in the absence of injunctive relief; and (3) that denying the requested relief would greatly injure the plaintiffs' interests as well as the public interest. On July 3, 2024, the court granted a preliminary injunction as to the plaintiffs only and stopped short of issuing a nationwide ban because it had concerns regarding standing, redressability, and the need for nationwide relief.
After additional briefing from the parties on those issues, the court issued a ruling on the merits on August 20, 2024. Citing Loper Bright, thecourt began with a review of the Act's text, structure, and history. The question before the court was whether the Act empowered it with substantive rulemaking authority to issue the Final Rule, as opposed to procedural rulemaking authority in connection with administering the Act. The FTC asserted that the Act empowered it with substantive rulemaking authority, but the court rejected that argument.
Next, the court analyzed whether the Final Rule was "arbitrary and capricious" under the APA. The court reasoned the FTC's record did not support the Final Rule, and that the Final Rule was overly broad without a reasonable explanation. The court found that the FTC imposed a one-size-fits-all approach, and failed to establish a connection between the facts that the FTC relied on and its choice to implement a categorical ban on non-compete agreements. Moreover, the FTC failed to consider the benefits of non-compete agreements, disregarded evidence supporting their implementation, and failed to thoroughly consider any alternatives. Therefore, the court found that the Final Rule was "arbitrary and capricious" under the APA.
Lastly, the court determined the proper remedy under the APA. Quoting Loper Bright, the court stated that "the text of the APA means what it says." Having found that the FTC exceeded its statutory authority in promulgating the Final Rule, and that the Final Rule was "arbitrary and capricious" under the APA, the court explained that the APA required the court to set aside the Final Rule. The court rejected the FTC's argument that the injunction should be limited to the plaintiffs only, reasoning that the APA does not "contemplate party-specific relief" (i.e., a court's decision to set aside a federal agency's action under the APA has a nationwide effect). The court held that the Final Rule is set aside, and is not to take effect or be enforced on September 4, 2024 or anytime thereafter.
2. What Comes Next?
For now, there is no non-compete ban at the federal level, so employers may continue entering into and enforcing non-compete agreements according to applicable state law. However, employers should keep in mind that the Ryan court's decision is not the last word on the Final Rule. The FTC will likely appeal the Ryan court's decision to the Fifth Circuit, and any decision by the Fifth Circuit court may lead to review by the Supreme Court of the United States. Separate and apart from Ryan, there are other pending legal challenges against the Final Rule. For example, in ATS Tree Services, LLC v. FTC (No. 24-cv-1743), the U.S. District Court for the Eastern District of Pennsylvania denied a motion for a preliminary injunction and reasoned that the FTC properly exercised its rulemaking authority when promulgating the Final Rule. In Properties of the Villages, Inc. v. Federal Trade Commission (5:24-cv-316), the U.S. District Court for the Middle District of Florida granted a preliminary injunction as to the plaintiffs in that case only, and reasoned that the FTC did not demonstrate that it had clear Congressional authorization to issue the Final Rule. Thus, while there will be no federal non-compete ban in the near future, the ultimate fate of the Final Rule is still to be determined.
3. A Note to New York Employers
New York employers should be aware that a non-compete ban at the state and/or local level could be on the horizon. In December 2023, Governor Hochul vetoed a bill that would have banned almost all employment non-compete agreements across New York State. In her Veto Memo, No. 133, Governor Hochul explained that a "one-size-fits-all approach" would not work in New York, and she was seeking a compromise that would "protect middle-class and low-wage earners, while allowing New York's businesses to retain highly compensated talent." Thus, the State legislature and Governor Hochul have made clear that they are in favor of a non-compete ban, albeit to different degrees, and it is possible that the State will see a revised version of the bill passed at some future point.
In New York City, it seems that City lawmakers have taken an interest in creating a non-compete ban at the local level after Governor Hochul's veto. In February 2024, City lawmakers introduced a bill that, as of its effective date, would prohibit employers from entering into non-compete agreements with a "worker," which the bill defines as "a natural person who works, whether paid or unpaid, for an employer." The bill would also require that employers rescind any non-compete agreements that predate the effective date of the bill. Notably, the bill does not contain a carve-out for executives or other highly compensated employees. The bill is in the early stages of review, and it is unclear whether the City will pass it. For further reading, the City's proposed bill may be accessed here.
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