FTC noncompete ban: Unlike Texas, Pa. denies motion to stay effective date
05 August 2024
When the U.S. District Court for the Northern District of Texas granted a motion early last month to postpone the effective date of the U.S. Federal Trade Commission’s (FTC) ban on noncompete agreements for the plaintiffs pending the outcome of their lawsuit, it said the FTC likely did not have the authority to impose the ban.
In issuing her decision regarding Ryan, et al. v. Federal Trade Commission, Judge Ada Brown said that “the text, structure and history of the FTC Act reveal that the FTC lacks substantive rulemaking authority with respect to unfair methods of competition under Section 6(g).”
But in a recent twist, the U.S. District Court for the Eastern District of Pennsylvania denied a similar motion for the plaintiffs in ATS Tree Services, LLC v. Federal Trade Commission, et al., saying the opposite about FTC authority.
The Pennsylvania Motion
On May 14, ATS filed a motion to stay the effective date of the FTC’s ban. According to the memorandum about the ruling on the motion, the company’s primary arguments were that it would be “irreparably harmed if the FTC’s Final Rule on non-compete clauses is permitted to go into effect on September 4, 2024, and that the FTC lacks the authority to issue this Rule.”
Judge Kelley Brisbon Hodge found that ATS failed to establish irreparable harm, which from a legal perspective was enough to deny the motion. However, the court speculated on the FTC’s authority to establish and enforce its ban on noncompete agreements. In the court’s memorandum, the court said it found that ATS “has failed to establish a reasonable likelihood that it will succeed on the merits of its claims that the FTC lacks substantive rulemaking authority under its enabling statute.”
Hugh F. Murray III, a partner in the law firm McCarter & English and chair of its labor and employment practice, said via email that the ruling on this motion adds uncertainty to the effective date of the FTC’s ban.
“The Texas court has indicated that it will rule on the plaintiffs’ request for a permanent injunction by the end of August, and that could end up being a broader injunction than the preliminary injunction it already issued,” he said. “There is also a significant likelihood that any injunction out of the Texas court will be limited in scope to the parties.”
According to Murray, the Pennsylvania District Court entered an order directing the litigants to file a joint status report within 14 days of the ruling on the preliminary injunction. This report will propose next steps in the case. It is due no later than Aug. 6. However, it’s unclear when there will be a final ruling in Pennsylvania District Court.
“Neither the order nor the court’s memorandum in support of the order sets forth a timeframe for when the Court will rule on the merits of the action,” said Laura Lawless, a partner in law firm Squire Patton Boggs in its labor and employment practice, via email.
Enforcing the Ban
Given the differing rulings on the motions — and the potential for different final rulings — the FTC’s enforcement of the ban depends upon the scope of each court’s final rulings.
“Barring a moratorium on enforcement by the FTC itself, the FTC final rule would become effective in jurisdictions where it has not been expressly enjoined and/or its effective date postponed,” Lawless said.
Scott Humphrey, partner at the law firm Benesch and chair of its trade secrets, restrictive covenants and unfair competition practice group, said he believed it unlikely that the Texas court’s final ruling would deviate from its preliminary ruling blocking the FTC’s ban.
“The question is, given the Pennsylvania federal court case now, will the Texas court make it a nationwide ban,” he said. “For the preliminary injunction, they just limited it to the actual plaintiffs. I think now, given what’s happened in Pennsylvania, that the odds are the Texas court will make it a nationwide ban.”
A Third Lawsuit
Adding an additional wrinkle is a third lawsuit against the FTC being adjudicated in the U.S. District Court for the Middle District of Florida. As with the other two lawsuits, plaintiffs in Properties of the Villages Inc. v. FTC filed a motion July 2 for a stay of the ban’s effective date. Murray said oral arguments regarding the motion are scheduled for Aug. 14.
“There remains a possibility that the Florida court will issue a more sweeping injunction before the effective date,” Murray said. “But there is also a distinct possibility that Sept. 4 will come, and the rule will go into effect (except as to specific parties who may have obtained an injunction for their own benefit before that date).”
Lawless said, “Like the judge in the Texas action, Judge Timothy Corrigan of the Middle District of Florida acknowledges the need to rule on an expedited basis, but he has not promised a date by which he will do so after the oral argument.”
Humphrey said he would expect the Florida court to rule before Sept. 4, but it’s moving at a slower pace than the lawsuits in Texas and Pennsylvania.
Implications of Chevron
The U.S. Supreme Court’s recent overturning of the Chevron doctrine is another consideration. Murray said that the Loper-Bright decision — the case that saw Chevron overturned — will be cited in every decision related to the FTC rule as well as others challenging any federal agency’s authority. However, he questioned its impact in the recent rulings.
“I do not think as a practical matter, however, that the changed standard will make any difference in this case (or frankly in many cases),” Murray said. “The Texas case, which was decided before Loper-Bright and therefore when Chevron was still good law, held that the agency did not have the power it claimed, while the Pennsylvania case was decided after the Supreme Court scuttled Chevron yet it determined that the agency did have the power it was claiming. If Chevron/Loper-Bright was determinative, one might expect the opposite result.”
Noting that the Chevron ruling occurred at the same time the Texas court ruled on the plaintiffs’ motion, Humphrey said it could be that the court had completed its ruling before Chevron was overturned.
“I candidly don’t see how the Chevron reversal doesn’t play a major role in the appeals to the third and fourth circuits,” he said, referring to the 3rd and 4th U.S. Circuit Courts of Appeals. “Because that’s the whole point. You’ve now reversed 70 years of deference to the administrative agency, and the courts are now saying that’s no longer good.”
Humphrey added that the conservative leanings of the U.S. Supreme Court could also play a role.
“The 6-3 conservative majority — I think they’ll rely heavily on the reversal of Chevron if and when this rule makes it up to the Supreme Court,” he said.
Employers’ Next Steps
Lawless said that while waiting for the courts to render their final decisions, “employers other than the plaintiffs in the Ryan LLC action should be using the next month to determine which of their employees are subject to covenants not to compete that would be rendered ineffective on the final rule’s effective date and preparing, but not yet sending, draft notices of their potential invalidity.”
Humphrey offered similar advice. “I think one of the things you can be doing now is, OK, let’s get our letters ready,” he said. “Let’s have the changes to our noncompete agreements be modified so if the rule does go into effect on Sept. 4, we’re ready to go.”
He added that employers should also be mindful of the “safe harbor” provision in the FTC’s rule.
“The safe harbor provision essentially says that if you believe to be in compliance with the rules and with the applicable laws, then you cannot be liable under this rule,” Humphrey said. “I think the Texas ruling gives a lot of companies [the ability] to maintain the status quo, because if somebody challenged them, they would have to say, ‘Wait a minute. I read the Texas decision. The Texas decision says that this is unenforceable. I relied on that in making my business judgements.’”
Humphrey also added that unlike some laws the noncompliance of which results in monetary or other punitive damages, the heaviest sanctions the FTC can hand down are “cease and desist” orders.
The safe harbor provision and the sanctions for not complying with the FTC rule means that companies have to determine their risk tolerance, Humphrey said.
“Maybe they say there’s still this split out there, so I’m just going to go ahead and comply with the rule,” he said. “It’s going to take a couple of years to get up to the Supreme Court.”
However, Humphrey cautioned that rescinding all noncompete agreements before a final Supreme Court ruling could be detrimental.
“If you rescind all your noncompetes and then the Supreme Court says, ‘FTC, you overstepped your jurisdiction. We’re striking down this ban.’ Well, you’ve already rescinded everything,” he said. “You can’t go back and say, ‘Sorry, we’re going to pull it back now. Everything’s back to being enforced.’”
