Banking and Business Monthly – July 2024

On July 3, 2024, the U.S. District Court for the Northern District of Texas issued a preliminary injunction against the FTC’s non-compete rule, which is set to ban most non-compete agreements nationwide starting September 4, 2024. The case, Ryan LLC v. Federal Trade Commission, was brought by Ryan LLC and several intervenor organizations including the U.S. Chamber of Commerce and Business Roundtable.

Background

As we explained in our May article, on April 23, 2024, the FTC finalized its Non-Compete Clause Rule that bans employers under its jurisdiction from using non-compete agreements with any worker, regardless of their job title or income, unless the agreement is part of selling a business. Under the Rule, “worker” is defined broadly to include any employee regardless of whether they are paid or unpaid, irrespective of title or status, including “independent contractor, extern, intern, volunteer, apprentice, or sole proprietor who provides a service to a person.” Existing non-compete agreements would become unenforceable for most employees, except for those classified as “senior executives” under the Rule. The Rule defines a “senior executive” as a worker earning total annual compensation of at least $151,164 in the preceding year who is in a “policy-making position.” Employees in policy-making positions are defined as an entity’s president, CEO, or equivalent, and any other officer of a business who has the authority to make policy decisions that control significant aspects of the business.

Starting September 4, 2024, employers must notify affected workers that their non-compete clauses will not be enforced. However, non-solicitation and confidentiality clauses may still be enforceable as long as they do not unfairly restrict competition.

The Ryan Case

When the Rule came out, Ryan LLC (Ryan) filed a lawsuit against the FTC. Ryan argued that the FTC exceeded its authority under the Federal Trade Commission Act (FTC Act) by creating rules that dictate substantive aspects of competition regulation. They claimed that the Rule was not authorized by law and thus unconstitutional, as the FTC lacked authority to engage in rulemaking. Ryan requested the court to declare the Rule unlawful. Additionally, they sought an order from the court to postpone the Rule’s effective date and prevent the FTC from enforcing it while the legal challenge was ongoing. In response, the FTC contended that it possesses statutory authority, as delegated by Congress, to establish the Rule. This authority includes the ability to classify all non-compete agreements as “unfair methods of competition.”

Districts Court’s Decision

On July 3, 2024, the District Court granted Ryan’s motion for a stay and preliminary injunction. The Court agreed with Ryan’s argument that the FTC lacks authority to enforce the non-compete ban. It also recognized that the plaintiffs would suffer irreparable harm if forced to comply with the Rule, particularly in the financial costs associated with notifying affected workers about the non-enforcement of existing non-compete clauses. Moreover, the Court determined that granting injunctive relief would uphold the public interest, as the Rule could render longstanding contractual agreements unenforceable. However, the Court restricted this relief to the plaintiffs, opting not to issue a universal injunction or extend it to members of the plaintiffs’ business associations. The Court plans to fully resolve the case and determine the scope of relief by August 30, 2024.

Future Outlook

The District Court’s ruling on the non-compete ban sets the stage for future legal challenges. By August 30, 2024, that court plans to decide the merits of the lawsuit, just days before the Rule banning non-competes is set to take effect. In a different lawsuit, ATS Tree Services, LLC v. FTC, the U.S. District Court for the Eastern District of Pennsylvania rejected ATS Tree Services' Motion for Stay of Effective Date and Preliminary Injunction on July 23, 2024, creating a split in decisions. The court found no irreparable harm and ruled that ATS Tree Services failed to demonstrate a likelihood of success in challenging the FTC’s Rule, which likely falls within the FTC’s authority. Appeals in both circuits—Fifth and Third—are now likely to follow, potentially leading to a U.S. Supreme Court review of the Rule in light of its recent overturning of Chevron deference to administrative agencies in Loper Bright Enterprises v. Raimondo, which changed how federal courts are to approach their review of a federal agency’s interpretation of a statute. The Loper Bright Enterprises decision means that federal courts are now less likely to defer to federal agencies’ interpretations of laws. Instead, courts will independently assess statutory interpretations, potentially influencing future decisions on regulatory challenges and federal agencies’ legal interpretations of statutes, such as embodied in the Rule.

In sum, until we have a nationwide injunction or court order holding the Rule to be unconstitutional, the prudent course for employers is to continue their preparations to comply with the Rule. For further inquiries or questions, please contact me at smigala@lavellelaw.com or (847) 705-7555. Thanks go to Anthony Letto for assistance with this month’s article.