Recent Decisions in Noncompete Cases Expose Deep Divides in Opposing Visions for Antitrust Enforcement

At a Glance

• In January 2023, the Federal Trade Commission introduced a new proposed rule under Section 5 of the FTC Act that bans almost all noncompete agreements between employers and employees as “unfair methods of competition.”  
• Parties filed legal challenges to the final rule within hours of its announcement. To date there are competing decisions from district courts in Texas and Pennsylvania regarding whether the FTC overstepped its authority when it engaged in substantive rulemaking. These decisions potentially foretell an upcoming circuit split and suggest that questions relating to the FTC’s substantive rulemaking authority may soon be ripe for Supreme Court review.
• In the wake of the Loper Bright v. Raimondo decision, the FTC’s authority under the Hart-Scott-Rodino Act may be vulnerable to similar challenges as seen in the recent noncompete cases. This is significant given the FTC’s recent efforts to revamp its HSR pre-merger notification requirements to require more information from parties.
• Similarly, the Loper decision may impact the FTC’s ability to revitalize its price discrimination enforcement efforts against parties in the food and beverage and pharmaceutical sectors.
• While Loper promises to have a significant impact on all agency rulemaking, conservative lawmakers and their allies also have proposed legislative changes to weaken the FTC’s authority, though they remain open to leveraging FTC rulemaking where available to further partisan political objectives.  

On July 3, 2024, plaintiffs in Ryan LLC v. Federal Trade Commission won their first significant victory in their noncompete case against the Federal Trade Commission (FTC) when Judge Ada Brown of the Northern District of Texas issued a ruling preliminarily enjoining the FTC’s final noncompete rule from going into effect against the Ryan plaintiffs as planned on September 4, 2024. While Judge Brown’s ruling does not currently extend beyond the Ryan plaintiffs to businesses nationwide, it is predicated on her finding that the FTC likely overstepped its authority under the FTC Act. We would expect her final ruling, which she has committed to issuing by August 30, 2024, to permanently enjoin the FTC from rolling out the noncompete rule to all businesses on schedule.

Plaintiffs’ successful challenge to the FTC’s controversial noncompete rule comes at a pivotal moment when deference to administrative rulemaking has been severely weakened by the Supreme Court’s recent decision in Loper Bright Enterprises v. Raimondo, 144 S. Ct. 22444 (U.S. 2024), and as notable changes to the regulatory landscape have been proposed both by the Trump campaign and by conservative scholars and activists through the Project 2025 transition policy initiative. The culmination of these changes in the legal and political landscape potentially foretells significant limitations on the FTC’s ability to limit arguably “unfair methods of competition” through the rulemaking process, which likely have implications for the noncompete rule as well as proposed rule changes relating to the premerger notification program and the FTC’s renewed efforts to enforce the federal price discrimination law.

Faegre Drinker attorneys have previously covered the FTC’s proposed and final noncompete rule, the Ryan litigation, and the ATS Tree Services litigation in prior alerts.

Recent Ryan LLC v. FTC Decision Undermines the FTC’s Noncompete Rule

In January 2023, the FTC introduced a new proposed rule under Section 5 of the FTC Act that bans almost all noncompete agreements between employers and employees as “unfair methods of competition,” subject to very limited exceptions. The final version of the rule was issued on April 23, 2024, and the rule is set to go into effect on a nationwide basis on September 4, 2024. Businesses that violate an FTC cease-and-desist order regarding the FTC’s noncompete rule potentially could be subject to court-ordered sanctions amounting to $51,744 per offense (indexed for 2024, and typically increasing every year).

When the FTC issued the final version of the rule, it was immediately challenged in the Northern District of Texas on behalf of accounting firm Ryan LLC by Gibson, Dunn & Crutcher partner Eugene Scalia (former President Trump’s secretary of labor). Not only does the Ryan complaint seek to enjoin the rule from taking effect, but it also takes aim at the FTC’s substantive rulemaking authority under Section 5 of the FTC Act and more broadly asks the court to declare the underlying structure of the FTC unconstitutional in view of the alleged improper insulation of the agency’s commissioners from presidential removal.

Judge Brown (a Trump appointee) issued a preliminary injunction in the Ryan case on July 3, 2024, preliminarily enjoining the implementation and enforcement of the FTC’s final rule as it applied to Ryan and other plaintiffs that have intervened in the litigation, including the U.S. Chamber of Commerce. In particular, the court held 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).” The court further held that the agency’s final noncompete rule is “arbitrary and capricious” because it is “unreasonably overbroad without a reasonable explanation.” Judge Brown has since declined to extend her ruling beyond the plaintiffs to apply nationwide; however, she has committed to issuing a ruling on the merits by August 30, less than a week before the rule’s September 4 effective date. Given this timeline, and the requirement that a preliminary injunction can only be granted if the plaintiff is likely to succeed on the merits, the Ryan decision signals that the rule is unlikely to take effect on a nationwide basis on the FTC’s original timeline.

In response to Judge Brown’s decision, the FTC issued a statement affirming the agency stands by its “clear authority, supported by statute and precedent” to issue the noncompete rule, and it vowed to continue defending the challenge. “We will keep fighting to free hardworking Americans from unlawful noncompetes, which reduce innovation, inhibit economic growth, trap workers, and undermine Americans’ economic liberty.” At the same time, FTC chairwoman Lina Khan continues to aggressively pursue budget increases to finance the FTC’s broad initiatives.

Another challenge to the noncompete rule is pending in Pennsylvania, ATS Tree Services, LLC v. FTC, where on July 23, 2024, the district court issued an order denying plaintiff ATS Tree Services’ motion to preliminarily enjoin the noncompete ban. Judge Kelley Brisbon Hodge (a Biden appointee) declined to limit the FTC’s rulemaking authority, finding that “the FTC is empowered to make both procedural and substantive rules as is necessary to prevent unfair methods of competition.” While Judge Hodge’s decision could be mooted by a permanent injunction in the Ryan case, the ATS Tree Services ruling foretells a potential circuit split and suggests that questions about  the FTC’s substantive rulemaking authority as it relates to preventing “unfair methods of competition” may soon be ripe for Supreme Court review.

Judicial Deference to the FTC in Question After Loper

The Ryan and ATS Tree Services decisions come at an already turbulent time for agency rulemaking. In ruling on the preliminary injunctions, both the Ryan and ATS Tree Services courts relied on the Supreme Court’s decision in Loper Bright Enterprises v. Raimondo, which overturned the long-established doctrine of deference to administrative interpretations of federal laws in the face of statutory ambiguity (known as Chevron deference), as previously established in Chevron USA, Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984).

Loper’s impact on antitrust enforcement may be somewhat limited, though still impactful. Courts have traditionally refrained from applying Chevron deference to antitrust agencies’ interpretations of substantive antitrust statutes. Instead, agency interpretations often inform their enforcement guidelines rather than being codified into formal rules or regulations. Moreover, as explained in the Ryan decision, in instances where the FTC traditionally has engaged in substantive rulemaking, it has done so under its authority with respect to “unfair and deceptive practices” (e.g., rules regarding the use of commercial reviews and testimonials, negative options, and unfair and deceptive fees), rather than “unfair methods of competition” that cover conduct within the realm of the antitrust laws. That said, the ATS Tree Services decision does not foreclose on the possibility of substantive rulemaking with respect to “unfair methods of competition,” finding that the ordinary meaning of the text provides the FTC with broad authority to promulgate rules prohibiting unfair methods of competition.

Practically speaking, there have not been many instances where courts have applied Chevron deference to FTC actions. However, courts have upheld Chevron deference to the FTC’s statutory interpretations concerning the Hart-Scott-Rodino Act (HSR Act), which governs merger reporting obligations. See, e.g., Pharmaceutical Research & Manufacturers of America v. FTC, 790 F.3d 198 (D.C. Cir. 2015) (holding that “[the FTC Act] give[s] the FTC, with the concurrence of the [DOJ], great discretion to define statutory terms and to promulgate rules to facilitate Government identification of mergers and acquisitions likely to violate federal antitrust laws . . . .”). Up until this point, courts consistently have afforded the FTC significant discretion to define terms within the HSR Act, as well as prescribe what information must be reported, who must report it, and how the report must be filed.

In the wake of the Loper decision, the FTC’s authority under the HSR Act may be vulnerable to similar challenges as seen in Ryan and ATS Tree Services. This is significant given the FTC’s recent efforts to revamp the HSR pre-merger notification requirements. The proposed HSR changes, which were unveiled on June 27, 2023, include a massive redesign of the HSR notification form, the introduction of new and expanded information requests, and additional disclosures by filing parties. If the FTC’s authority to overhaul the HSR reporting requirements is challenged, a court could decide that Loper limits the breadth of the information that the antitrust enforcement agencies can require from parties.  

Similarly, the Loper decision could affect the FTC’s ability to combat allegedly anticompetitive price discrimination, particularly if, as FTC representatives have hinted, the FTC tries to use its authority under Section 5 of the FTC Act to close gaps in the notoriously rigid Robinson-Patman Act (RPA). While the FTC has not brought an RPA enforcement action for price discrimination since 2000, it has several active investigations pending against parties in the food and beverage sector, and FTC representatives have specifically commented that the FTC could use a combination of RPA and Section 5 principles to combat price gouging by large grocery chains that force deep discounts from their suppliers without passing their savings along to customers. But if Loper limits the FTC’s ability to promulgate rules that effectively stretch the RPA’s definition of price discrimination and what it means to induce such discrimination from sellers, it will make it more difficult for the FTC to pursue novel cases against large companies that leverage discriminatory discounts while continuing to raise prices for consumers and increase corporate profits.

In the same vein, Loper could impact the FTC’s ongoing inquiry into rebates and fees paid by drug manufacturers to pharmacy benefit managers (PBMs), which the FTC has alleged result in PBMs favoring high-cost drugs that generate large rebates and fees that are not shared with patients.

Implications for a Possible Trump Presidency

As the legal landscape has undergone major shifts relating to agency authority, the FTC faces an equally tumultuous political landscape in the wake of the upcoming presidential election. The conservative agenda set forth in the Project 2025 transition policy initiative — a Heritage Foundation publication, co-authored by notable conservative scholars and activists — aims to bring independent administrative agencies like the FTC under the president’s control. Former President Trump has been a vocal advocate of this shift, asserting that agencies such as the FTC should be reined in and placed under presidential authority “as the Constitution demands.” The FTC chapter in Project 2025 also advocates that the FTC be required to “submit any regulations they are considering for White House Review,” potentially ensuring that agency actions would closely align with the vision of a second Trump administration.

This vision is in contrast to the FTC’s current broad and aggressive initiatives and includes harnessing the FTC to pursue partisan social objectives, including investigating private equity firms pursuing environmental, social and governance (ESG) and diversity, equity and inclusion (DEI) initiatives; prohibiting refusals to do business with fossil fuel suppliers and gun manufacturers; and regulating registration for social media platforms. While conservative activists question the FTC’s authority under Section 5, and ultimately hope that jurists will limit the FTC’s expansive scope as unlegislated substantive rulemaking under Section 6 of the FTC Act, Project 2025 at least temporarily embraces the full scope of the FTC’s historic powers “to use the power of government to further a conservative agenda.”

Although Project 2025 includes the most recent anti-regulatory proposal for a potential second Trump administration, current conservative lawmakers have proposed similar actions, including in the One Agency Act sponsored by Republican House member Ben Cline. The bill seeks to dissolve the FTC’s Bureau of Competition and absorb its functions and employees into the Department of Justice’s Antitrust Division. While no subsequent action has been taken on this act since it was submitted to the House for a vote in April 2024, the proposal is an example of political attempts to undermine the FTC’s scope of authority.

In Conclusion

The antitrust laws are nuanced and complex, and their application to specific business practices requires detailed analysis with an eye toward reigning and prospective political goals. As the landscape continues to develop, companies should work with antitrust counsel to assess the current state of the antitrust laws as they pursue their business objectives.