Updated on August 17, 2024

As we previously reported, here, the Federal Trade Commission (FTC) issued a Final Rule on April 23, 2024 that would prevent most employers from enforcing non-compete agreements against workers, effective September 4, 2024 (the “Rule”). As a result of a preliminary injunction entered against the Rule by a Texas federal court, employers are in limbo as to whether the Rule will impact their businesses.

The same day the FTC issued its Rule, a tax consulting firm based in Texas, Ryan LLC, sued the FTC in U.S. District Court for the Northern District of Texas challenging the FTC’s authority to issue such a rule. The United States Chamber of Commerce and others intervened as plaintiffs. A related lawsuit was filed in the Eastern District of Texas federal court the next day, but that lawsuit was stayed based on the earlier filing in the Northern District. 

On the eve of Independence Day, July 3, 2024, Judge Ada Brown of the Northern District of Texas issued a stay and a preliminary injunction against the FTC, halting implementation of the Rule. The Judge wrote in her order that the plaintiffs “are likely to succeed on the merits that the FTC lacks statutory authority to promulgate the Non-Compete Rule, and that the Rule is arbitrary and capricious.” Judge Brown declined to issue a nationwide preliminary injunction, limiting the order to the named plaintiffs, but stated that such injunctive relief “serves the public interest.”

The Judge further agreed with the plaintiffs that compliance with the Rule would cause them to suffer non-recoverable costs, including increased risk that departing workers may take the company’s intellectual property and proprietary methods to its competitors, which cannot be effectively mitigated by trade secret laws and non-disclosure agreements. Further, companies would have to expend significant time and resources to counteract the Rule and update all existing agreements.

On July 10, 2024, the plaintiffs filed an Expedited Motion for Limited Reconsideration of The Scope of Preliminary Relief, asking Judge Brown to expand the preliminary injunction to apply nationwide until the final decision on the merits. The next day, Judge Brown denied the motion stating, the plaintiffs “have not shown themselves entitled to the respective relief requested.”

Judge Brown expects to issue a final decision on the merits of the lawsuit by August 30, 2024, which, based on the reasoning in her preliminary injunction, is expected to permanently enjoin the FTC from implementing the Rule, at least as it pertains to the named plaintiffs.

Notably, Judge Brown’s order comes just days after the U.S. Supreme Court’s opinion in Loper Bright Enterprises v. Raimondo, striking down the 40-year old precedent of “Chevron deference” under which courts deferred to agency interpretations of ambiguous statutory language. The Supreme Court ruling expands the courts’ authority to independently interpret statutes without deference to the administrative agencies that enforce them. Given that Judge Brown’s final ruling likely hinges on her interpretation of the FTC’s statutory authority to issue the Rule, Loper Bright would seem to support a permanent injunction against the Rule. 

In a similar lawsuit against the FTC, pending in the U.S. District Court for the Eastern District of Pennsylvania, the court denied ATS Tree Services, LLC’s (“ATS”) request for a state-wide preliminary injunction against the Rule on July 23, 2024. Judge Kelley B. Hodge held that the FTC has clear legal authority to issue “procedural and substantive rules as is necessary to prevent unfair methods of competition” and found that ATS failed to show how its company of 12 employees would suffer irreparable harm if the Rule were to go into effect. The court is expected to rule on the parties’ motions for summary judgment by November 27, 2024.

In a third similar lawsuit against the FTC, pending in the U.S. District Court for the Middle District of Florida, the court granted Properties of the Villages, Inc.’s (“POV”) motion to stay the effective date of the Rule and request for preliminary injunction against the Rule–only as to the plaintiff. POV had argued that it invested significant resources to develop training and a sales platform for its sales associates, who’s 24-month non-compete agreements were upheld by the court just over three years ago. In the court’s August 15, 2024 bench order, Judge Timothy J. Corrigan held that POV would suffer irreparable harm if the Rule went into effect as POV would have to incur costs and endure business disruptions to review its existing contacts and practices for compliance with the Rule while litigation continues. In balancing the equities and the public interest, the court stated that “the government may in fact not be operating within the bounds of the statute” and found “the FTC will not be substantially harmed by the maintenance of the status quo until a final decision on the validity of the [Rule] is reached.”

With the September 4, 2024 nationwide effective date for the Rule approaching, employers are currently left with uncertainty as to the potential impact the Rule will have on them, as well as the likely possibility that the Texas, Pennsylvania, and Florida courts could reach different rulings. In the meantime, Ballard Spahr’s Labor and Employment Group will continue providing real time guidance to employers on their use of non-competes and other restrictive covenants to protect legitimate, proprietary business interests.