Judge Issues Nationwide Injunction on FTC Noncompete Final Rule

On Tuesday, Aug. 20, a federal judge in Texas issued a nationwide injunction barring the implementation of a Federal Trade Commission final rule that would have banned noncompete agreements for most U.S. organizations. This is the latest in a series of court decisions centered on the validity of the FTC’s rule-making authority — and this decision is, by far, the most consequential for the agency (and other government agencies), as well as American employers and workers.

Under the final rule announced by the FTC on April 23, covered employers had until Wednesday, Sept. 4, to comply by nullifying most past agreements and eliminating this employment stipulation in most future dealings. All requirements under the final rule are now voided.

The Aug. 20 decision by Judge Ada Brown, presiding in the U.S. District Court for the Northern District of Texas, is a follow-up to the preliminary decision she rendered July 3 in the case Ryan LLC v. Federal Trade Commission. In a 33-page ruling entered on July 3, Brown determined:

The FTC does not have the statutory authority to engage in competition-related rulemaking.
The noncompete rule is “arbitrary” and “capricious.”
The plaintiffs and plaintiff-intervenors had satisfied the standard to obtain injunctive relief.

At the time, Brown limited application of her ruling to the plaintiff (Ryan LLC, a tax software and services firm) and the plaintiff-intervenors (the U.S. Chamber of Commerce, the Business Roundtable, the Texas Association of Business and the Longview Chamber of Commerce) in their direct roles as employers. As a caveat in her ruling, she opined, “The court intends to rule on the ultimate merits of this action on or before August 30, 2024.”

That final ruling was entered 10 days before her self-imposed deadline and took the form of a one-page, one-paragraph signed statement. Brown wrote, “Having granted Ryan and plaintiff-intervenors’ motions for summary judgment (ECF Nos. 166, 168) and denied the FTC’s motion for summary judgment (ECF No. 184), the Court has adjudicated all of [the] plaintiffs’ claims. The Court sets aside the Non-Compete Rule, 16 C.F.R. § 910.1–.6, and the Rule shall not be enforced or otherwise take effect on September 4, 2024, or thereafter. This is a final and appealable judgment. ... All relief not expressly granted is denied.”

Comments on the Verdict and its Impact

Representatives from both sides of the Ryan case, as well as several law firms, weighed in on Brown’s terminal judgment.

The U.S. Chamber of Commerce, unsurprisingly, lauded the decision and its implications. In a statement posted to the Chamber’s website, president and CEO Suzanne P. Clark commented, “[This] is a significant win in the Chamber’s fight against government micromanagement of business decisions. A sweeping prohibition of noncompete agreements by the FTC was an unlawful extension of power that would have put American workers, businesses and our economy at a competitive disadvantage. We remain committed to holding the FTC — and all agencies — accountable to the rule of law, ensuring American workers and businesses can thrive.”

In a statement to several news outlets, FTC spokesperson Victoria Graham said the agency was disappointed with the ruling and is “seriously considering” an appeal. “Today’s decision does not prevent the FTC from addressing noncompetes through case-by-base enforcement actions,” she said.

The FTC estimates roughly 30 million Americans — or 1 in 5 workers — are subject to such employment contracts and believes eliminating them would bolster opportunities and increase wages.

In Ryan and in two other related cases (ATS Tree Services LLC v. FTC and Properties of the Villages, Inc. v. FTC), the defendants pointed to Section 6 of the Federal Trade Commission Act, which the agency says grants it “additional powers to support the adjudicatory scheme.”

In a statement after the initial July 23 Ryan verdict, the FTC remarked, “This language [within Section 6] means what it says: The FTC can issue legislative rules — meaning rules that have the force of law — to prevent unfair methods of competition. Proceeding by rulemaking rather than case-by-case enforcement is a much more efficient way to address noncompetes.”

However, legal experts say the Supreme Court’s June 28 ruling in the adjoined cases Loper Bright Enterprises v. Raimondo and Relentless v. Department of Commerce thwart such power. Those case decisions voided the so-called Chevron doctrine, a decades-old standard that required courts to give substantial deference to agencies like the FTC.

“The decision is one of the first prominent cases [post-Chevron] to demonstrate the evolving power of courts to overrule agency actions,” law firm Fisher & Phillips LLP stated in a post on its website.

With this power to decide whether a government agency’s actions are appropriate and within its purview, courts can more easily strike down agency rules.

“[The Aug. 20 decision] is a perfect example of how this new standard will be deployed by courts to significant effect,” Fisher & Phillips LLP continued. “The first sentence of Judge Brown’s analysis section [in the July 3 order] quotes the Supreme Court’s Loper Bright case, in fact, noting that the Administrative Procedure Act should serve ‘as a check upon administrators whose zeal might otherwise have carried them to excesses not contemplated in legislation creating their offices.’”

If the FTC does lodge an appeal, legal observers say the case would likely be put before the conservative U.S. 5th Circuit Court of Appeals in New Orleans. That appellate court has become a favorite for opponents of President Joe Biden’s policies on federal regulatory power, guns, abortion and social media regulation.

If that falls through, would the FTC have the stomach and resources for case-by-case enforcement? “Without an enforceable rule on which to rely, we do not envision the FTC pursuing tenuous complaints against employers that maintain reasonably drafted noncompete agreements,” said Sean Urich, a lawyer with Ogletree Deakins.

Action Against Noncompetes Occurring at the State Level

Whether or not the FTC appeals, the topic of noncompete agreements will remain hot. Action and momentum are occurring at the state level. The legislation landscape shows:

Seven states (Arizona, Connecticut, Georgia, Kentucky, Missouri, New York and Tennessee) recently proposed bills to restrict (or further restrict) noncompete clauses.
Three states (Iowa, Louisiana and Pennsylvania) have noncompete laws that will take effect in the near future.
Twenty-five states (plus the District of Columbia) have laws in effect that limit noncompete clauses in some form: California, Colorado, Connecticut, Delaware, Florida, Illinois, Indiana, Kentucky, Maine, Maryland, Massachusetts, Montana, New Hampshire, New Jersey, New Mexico, North Dakota, Oklahoma, Oregon, Rhode Island, South Dakota, Tennessee, Texas, Virginia, Washington and West Virginia.

“States across the country continue to pass new legislation further restricting — and, in some cases, banning — the use of noncompete clauses,” said James Barrett, a lawyer with Ogletree Deakins. “In particular, companies using multi-state agreements should have those agreements reviewed annually, at a minimum, to ensure compliance with applicable state law.”

Next Steps for Employers

Given the news at the federal level, how else should employees proceed?

Plenty of law firms provided strategy guidance — on their websites and in interviews with Workspan Daily — in the 24 hours following the verdict.

Melissa McDonagh, an employment lawyer with Littler Mendelson P.C., said: “Employers should continue to be thoughtful with their approach to noncompete agreements, ensuring compliance with existing state laws and monitoring the status of the FTC rule as it winds its way through the appellate process.”

Pamela Ploor, an attorney at Stafford Rosenbaum LLP, wrote: “Employers can use some of the time freed up from FTC compliance for restrictive covenant maintenance. Noncompetition agreements, confidentiality agreements and nonsolicitation agreements are not ‘one and done’ forms that apply to all employees and never need to be updated. The agreements with the best chance of court enforcement are those that experienced legal counsel has recently reviewed and updated.”

ArentFox Schiff LLP wrote to prepare for employee challenges: “An important part of the court’s decision is its rejection of the FTC’s factual findings, which were made in support of the rule, as poorly reasoned and poorly supported. ... We anticipate that employees may cite the FTC’s findings to support challenges to enforceability under state law. The court’s analysis of the FTC’s factual findings may substantially undermine the persuasive authority of the FTC’s findings.”

The Smith Anderson law firm posted: “Take other measures to protect confidential information and trade secrets, including limiting physical and electronic access based on need-to-know, having confidentiality and security policies, and using onboarding and offboarding processes to train and remind workers about confidentiality, noncompete, nonsolicit and return-of-property obligations.”

History of the FTC Final Rule and Related Court Cases

Workspan Daily has covered news surrounding the noncompete ban since the FTC unveiled its final rule April 23. For additional perspective, check out these past articles:

Editor’s Note: Additional Content

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