As discussed in our prior article, the Federal Trade Commission (FTC) issued a final rule (the Rule) banning most non-competes in the employment arena throughout the nation with an effective date of September 4, 2024. The Rule also requires employers to provide relevant workers with existing non-competes notice that such agreements are no longer in effect and includes model language that satisfies this notice requirement.
Since its announcement, the Rule has drawn criticism on numerous grounds, as well as legal challenges in the courts. Unfortunately, the courts have yet to provide clarity on the viability of the Rule, as evidenced by two recent and conflicting decisions handed down at the federal court level.
At issue in both cases were plaintiffs' requests for a preliminary injunction preventing enforcement of the Rule. In federal court, a four-part balancing test must be met by the plaintiff before a decision can be entered in its favor.
On July 23, 2024, in the case of ATS Tree Services, LLC v. FTC, et al., Judge Kelley Hodge of the U.S. District for the Eastern District of Pennsylvania denied the plaintiff's motion for stay of the effective date of the Rule and for a preliminary injunction preventing enforcement of the Rule. In doing so, Judge Hodge found that the plaintiff failed to establish a reasonable likelihood that it would succeed on the merits of its claims that the FTC lacks substantial rulemaking authority under its enabling statute, that the FTC exceeded its authority, and that Congress unconstitutionally delegated legislative power to the FTC. Judge Hodge also held that the plaintiff failed to establish that it would suffer irreparable harm as a result of the enactment of, and its compliance with, the Rule. As the plaintiff failed to prove these two factors, the Judge opined that analysis of the final two prongs of the preliminary injunction analysis, the balance of the equities and the public interest, were unnecessary.
The holding in ATS directly conflicts with the earlier ruling of Judge Ada Brown of the U.S District Court for the Northern District of Texas in Ryan LLC v. Federal Trade Commission. In Ryan, Judge Brown preliminarily enjoined, on July 1, 2024, the implementation and enforcement of the Rule against the plaintiff and plaintiff-intervenors (four in total, including the Chamber of Commerce), and, as to the plaintiff and plaintiff-intervenors, stayed the Rule's September 4, 2024 effective date. Judge Brown denied the plaintiffs' request to extend the injunction nationwide, finding that the Plaintiffs had not briefed "why nationwide injunctive relief is necessary to provide complete relief to Plaintiffs, at this preliminary stage." Thus, Judge Brown's ruling does not alter the effective date of the Rule for any employers besides the plaintiffs in Ryan.
In her ruling in Ryan, Judge Brown opined that the plaintiffs were likely to establish all four elements necessary to obtain a preliminary injunction. Specifically, Judge Brown held that (1) the plaintiffs were likely to succeed on the merits, namely, that the FTC lacks authority to issue the Rule and that the Rule is unlawful under the Administrative Procedure Act; (2) the plaintiffs established that they would suffer irreparable harm absent injunctive relief, and (3) the balance of the harms and the public interest favored the plaintiffs.
What Can We Expect Next From The Courts?
In the Ryan decision, Judge Brown stated her intention to rule on the merits of the case and dispose of the action on or before August 30, 2024, just days before the effective date of the Rule. Given Judge Brown's position that the FTC lacks authority to issue the Rule and that the Rule is unlawful under the Administrative Procedure Act, coupled with the recent Supreme Court decision in Loper Bright Enterprises v. Raimondo (diminishing deference afforded to administrative agencies), there is a good chance that Judge Brown will block the Rule nationwide. If this occurs, employers can expect the FTC to appeal the decision. The plaintiff in ATS also may choose to appeal Judge Hodge's decision. Depending on how the respective Circuit Courts rule in the event of both appeals, the validity of the Rule may end up at the doorstep of the Supreme Court.
What Should Employers Do?
Employers should continue to monitor legal developments regarding the Rule. They also may want to prepare for compliance with the Rule in the event it takes effect on September 4, 2024, including compiling a list of non-competes binding current and former employees, drafting the required notices to those current and former employees, and determining whether to require senior executives to execute a non-compete prior to September 4, 2024.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.