Litigation update on the FTC’s rule banning most employment non-compete clauses – Part 3 – Technologist

By Greg Care

In this blog, we’ll be reviewing the status of the litigation challenging the validity of the FTC’s rule prohibiting nearly all non-competes. There have been some interesting developments that affect whether the rule will ever be enforced.

To recap, in April 2024, the FTC issued a regulation that, except in limited circumstances, made it illegal for employers from to prevent their employees from working for or owning a business that is engaged in essentially the same work they did for the employer. The regulation was to go into effect on September 4, 2024. As discussed in our first litigation update, legal challenges came swiftly, resulting in a mixed bag of rulings. Our second update tracked how those initial cases progressed and the major decision in a third case.

Here’s where the known cases on this issue stand:

Ryan LLC v. Federal Trade Commission, No. 3:24-CV-00986-E (N.D. Tex.)

On July 3, 2024, Judge Ada Brown found that the challengers of the FTC’s rule would likely prevail in invalidating it, granting just those plaintiffs preliminary relief from complying with the rule. 

On August 20, 2024, Judge Brown made a final decision that the FTC exceeded its statutory authority in implementing the rule, and that the rule is arbitrary and capricious. Importantly, this decision expanded the relief to prohibit the enforcement of the rule on a nationwide basis.

On October 18, 2024, the FTC appealed this decision. A briefing schedule should be issued soon.

ATS Tree Services, LLC v. Federal Trade Commission, No. 2:24-cv-01743 (E.D. Pa.)

On July 23, 2024, Judge Kelley Brisbon Hodge denied a motion seeking an injunction against (or at least a stay of) enforcement of the FTC rule. Her opinion held that the plaintiff did not demonstrate it has “a reasonable chance, or probability, of winning their case” and would face no “irreparable” injury while awaiting the Court’s final ruling.

On August 6, 2024, the parties filed a joint report proposing deadlines for briefing on motions for summary judgment that would, for all intents and purposes, be the final decision by the trial court.

On October 3, 2024, the Court denied the plaintiff’s request to stay this case pending an outcome of a potential appeal in the Texas litigation.

The next day, the plaintiff dismissed the case.

Properties of the Villages, Inc. v. Federal Trade Commission, No. 5:24-cv-00316 (M.D. Fla.)

On August 14, Chief Judge Timothy J. Corrigan granted a preliminary injunction that excused the plaintiff from complying with the FTC’s regulation, finding that the “major questions doctrine” precluded it from being issued. In essence, the Court found that the FTC has the authority to issue substantive regulations to prevent unfair competition, but that the “extraordinary . . . economic and political significance” of this particular issue required the FTC to have more specific and clear authority from Congress than it had, especially where there is already significant state regulation of the issue and no other federal regulation of it.

On September 24, 2024, the FTC appealed the Court’s decision to the U.S. Court of Appeals for the Eleventh Circuit. The FTC’s brief in support of its appeal is due on November 4, 2024 and the opposing brief is due within 30 days of that filing. Any reply brief by the FTC would follow within 21 days. I would expect a very interesting oral argument on this appeal and will provide an update once that has occurred.

What’s Next?

Unless a new case challenging the FTC’s rule percolates up through the courts, the two cases going forward (Ryan LLC and Properties of the Villages) are ones where the FTC is largely on the defensive. This is not merely because the agency lost at the trial court level; after all, the appellate courts will be reviewing the legal basis for the summary judgment decisions de novo (i.e., with fresh eyes and not giving deference to the trial court). The FTC is on the defensive more so because of the perceived, if not real, difficulty of persuading the judges on these courts when it comes to defending government regulations.

The appeal in the Ryan LLC case will be heard by the U.S. Court of Appeals for the Fifth Circuit which many believe, with some basis, is not a particularly hospitable place for agency rulemaking. So, there was a serious question of whether the FTC would appeal in this case. The FTC’s Chair, Lina Khan, was coy about this in her recent interview on 60 Minutes. The fact that the FTC waited until almost the last day to appeal (compared to the faster notice of appeal in Properties of the Villages) suggests that there was much more deliberation about appealing the Ryan LLC case. I predicted that the FTC would appeal because the non-compete rule was a major policy objective for Chair Khan and the Biden Administration. There’s also some reason to believe that the perceived hostility in these courts to agency rulemaking is not as severe as some believe. For example, in a case decided by the Fifth Circuit last month, the Court upheld U.S. Department of Labor regulations defining and delimiting the so-called “White Collar Exemption” in the Fair Labor Standards Act. The challenge was based, in part, on the same attack on the FTC’s non-compete rule: that the agency exceeded its authority. Admittedly, the Department of Labor’s argument was a bit different (and stronger) given the express wording regarding the authority to regulate in the Fair Labor Standards Act, but this case nonetheless suggests that defensible rulemakings are not dead on arrival as some might argue.

We will be following these developments but, in the meantime, the abiding focus remains on how state law deals with non-competes. This is done both by statute, which may ban or limit non-competes, or court decisions that apply common law to decide the reasonable bounds of non-competes in a particular situation. Parsing that state law can be tricky. So, it remains important to follow local and state developments and obtain competent counsel on whether and how a non-compete may be enforced in a case-specific situation.

If you have questions regarding non-competes in your situation, please contact us today to see if we can assist with your particular circumstances.

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