Northern District of Texas Issues Nationwide Halt on the Implementation of the FTC’s Noncompete Ban
Rob Thomas, Of Counsel
The Rocky Mountain Employer has been keeping a close watch on the Federal Trade Commission’s (“FTC”) final Non-Compete Clause Rule (the “Rule”), including the U.S. District Court for the Northern District of Texas’s issuance of a preliminary injunction against enforcement of the Rule as against the named plaintiffs to that case (Ryan LLC v. Federal Trade Commission) and the U.S. District Court for the Eastern District of Pennsylvania’s contrary decision upholding the legality of the Rule (ATS Tree Service, LLC v. Federal Trade Commission).[1] Now, just fifteen days ahead of the FTC’s anticipated September 4, 2024 effective date for the Rule, the presiding judge in Ryan, LLC—Judge Ada Brown—has granted summary judgment in favor of the challenging plaintiffs and has announced a nationwide block on the Rule from going into effect on September 4.
Further Challenges to the Rule Since the Ryan LLC Preliminary Injunction
As a reminder, the FTC’s Rule was poised to effectively ban nearly all noncompete agreements nationwide, both retroactively and prospectively, with the only notable exceptions being for noncompete agreements entered into as part of the purchase or sale of a business, as well as noncompete agreements between businesses and certain “senior executives” earning at least $151,164.00 per year which existed prior to the effective date of the Rule. When the Ryan LLC court first enjoined enforcement of the Rule as against the specific plaintiffs to that case, it held that the Rule was beyond the scope of the FTC’s rulemaking authority and was otherwise arbitrary and capricious due to the FTC’s lack of evidence supporting a sweeping ban on noncompete agreements, as opposed to a more limited rule targeting particularly harmful noncompete agreements.[2]
The Eastern District of Pennsylvania took a nearly opposite position in its ATS Tree Service, LLC decision, finding that there was no statutory language in the FTC Act that distinguished between the FTC’s ability to issue either “procedural” or “substantive” rules to prevent unfair competition, and that the Rule was otherwise within the scope of the FTC’s rulemaking authority.[3] And, just last week on August 15, 2024, Judge Timonthy Corrigan of the U.S. District Court for the Middle District of Florida enjoined the enforcement of the Rule as against the named plaintiffs when he held from the bench that the Rule implicated the “major questions doctrine,” which requires an agency like the FTC to point to clear congressional authorization when it attempts to issue rules of extraordinary economic and political significance, and that the FTC failed to do so.[4]
The Nationwide Block on the FTC’s Rule
Until now, decisions enjoining application of the FTC’s Rule were only specific to the named plaintiffs in those cases. However, in issuing summary judgment in favor of Ryan LLC and the other named plaintiffs, Judge Brown has effectively blocked the FTC from implementing the Rule nationwide for the same reasons as previously set forth in her order granting the prior preliminary injunction. This power to implement nationwide relief from the FTC’s Rule is derived from Article III, Section 1 of the United States Constitution, which vests “judicial Power of the United States” in the Supreme Court and the lower courts established by Congress. Unsurprisingly, the FTC has already indicated that it is considering an appeal of Judge Brown’s decision, which could find its way to the U.S. Supreme Court.
Employer Considerations
While employers in Colorado and elsewhere no longer need to scramble to address any existing noncompete agreements which would become unlawful as of September 4, 2024, Judge Brown’s block of the FTC’s Rule nonetheless has no impact on individual state prohibitions against noncompete agreements. As Colorado employers are well-aware, such agreements remain subject to particular scrutiny in this state and are only enforceable when made for the limited purpose of protecting trade secrets, and only as to “highly compensated employees” as defined by Colorado law. Campbell Litigation will continue to monitor the FTC’s Rule if and when it reaches the appellate level and, as always, remains available to assist employers in navigating Colorado’s own restrictions against noncompete and non-solicitation agreements between employers and employees
[1]See https://www.rockymountainemployersblog.com/blog/2024/5/2/ftcs-final-rule-banning-most-noncompete-agreements-already-under-fire-in-federal-court; https://www.rockymountainemployersblog.com/blog/2024/7/11/federal-district-court-enjoins-the-ftcs-rule-banning-nearly-all-non-compete-agreements; https://www.rockymountainemployersblog.com/blog/2024/8/1/recent-court-ruling-signals-a-split-in-authority-regarding-the-validity-and-enforceability-of-the-ftcs-final-rule-banning-nearly-all-noncompete-agreements
[2] Ryan LLC v. Federal Trade Commission, 2024 WL 3297524 (N.D. Tex. July 3, 2024).
[3]ATS Tree Services, LLC v. Federal Trade Commission, 2024 WL 3511630 (E.D. Pa. July 23, 2024).
[4] Properties of the Villages, Inc. v. Federal Trade Commission, 2024 WL 3870380 (M.D. Fla. Aug. 15, 2024).