The FTC’s Noncompete Ban: An Update on Legal Challenges and What Comes Next

Breaking Update (August 20, 2024)

In the Ryan v. FTC litigation, the Northern District of Texas has issued its final decision on the parties' summary judgment motions and concluded that the FTC noncompete rule is unlawful. The Court ordered: "The Non-Compete Rule . . . is hereby SET ASIDE and shall not be enforced or otherwise take effect on September 4, 2024, or thereafter." Stay tuned for further updates from our team.

The alert below was authored on August 13, 2024.

At a Glance

• While the FTC’s noncompete ban is still scheduled to go into effect on September 4, 2024, there are three ongoing legal challenges to it; and there are pending motions in all three cases that could enjoin it either nationwide or on some limited basis before then.
• Given the U.S. Supreme Court’s decision last term in Loper Bright Enterprises v. Raimondo, overturning the Chevron doctrine of agency deference, we anticipate the Supreme Court may apply Loper Bright’s new test to the FTC’s adoption of the Rule. However, the issue may not reach the Court for years. 
• In the meantime, employers may wonder what to do. We outline several options.

As we previously reported on April 23, 2024, the Federal Trade Commission (FTC) issued its final rule banning employers from entering into, enforcing or attempting to enforce most postemployment noncompete clauses (the Rule). The Rule also invalidates such existing agreements, except for certain Senior Executives (as defined by the Rule), and mandates that employers notify affected employees by the Rule’s September 4, 2024 effective date. 

Current Legal Challenges

While the Rule is still scheduled to go into effect on September 4, there are three ongoing legal challenges to it; and there are pending motions in all three cases that could enjoin it either nationwide or on some limited basis before then. We summarize the status of those three cases below, and then provide an overview of what comes next for employers.

Ryan LLC v. Federal Trade Commission (Northern District of Texas)

• A preliminary injunction against the Rule was issued on July 3, which applies only to the plaintiffs in that case (See our previous reporting).
• A nationwide injunction was denied due to insufficient briefing.
• A decision on summary judgment motions is expected by August 30, 2024. That decision could potentially expand the injunction or invalidate the Rule in its entirety.

ATS Tree Services v. Federal Trade Commission (Eastern District of Pennsylvania)

• The ATS court rejected the plaintiff’s request for an injunction on July 23, 2024, reaching the opposite conclusion of the Ryan court (see our prior reporting). 
• A summary judgement decision is unlikely before the end of November.
• We do not expect any further action by the ATS court before September 4, 2024. 

Properties of the Villages, Inc. v. Federal Trade Commission (Middle District of Florida)

• The plaintiff presents challenges to the Rule that mirror the arguments of the plaintiffs in Ryan and ATS. 
• The plaintiff’s motion for a preliminary injunction and to stay the Rule’s effective date is pending; and oral argument will take place on August 14, 2024.
• It is possible the court will issue its decision before September 4, 2024. That decision could resemble the decision in Ryan, or the decision in ATS, or it could be completely different (e.g., a nationwide injunction is possible).

What’s Next?

Pending further rulings, employers are left questioning whether the Rule will go into effect on September 4, 2024. 

Adding to the confusion is the likelihood of a lengthy appeals process. Given the U.S. Supreme Court’s decision last term in Loper Bright Enterprises v. Raimondo, overturning the Chevron doctrine of agency deference, we anticipate that the Supreme Court may apply Loper Bright’s new test to the FTC’s adoption of the Rule. However, the issue may not reach the Supreme Court for years.

What Does This Mean for Employers?

In the meantime, employers may wonder what to do. Employers can consider:

• Preparing to send the required notices by collecting a list of and analyzing agreements potentially covered by the Rule
• Analyzing existing noncompete, nonsolicit and garden leave provisions to consider whether changes are needed due to evolving standards — separate and apart from the FTC Rule, including at the state level — that courts apply to restrictive covenants
• Assessing the possible application of the Senior Executive exception, if the FTC Rule does go into effect
• Drafting (but not yet sending) a template notice (whether in the form provided by the Rule or modified)

Employers should also evaluate with their counsel the potential consequences of not being in full compliance by September 4, 2024, particularly given the limited remedies available against employers who do not follow the Rule. The Rule does not provide for a private right of action (though employees may have a private right of action under analogous state laws). Furthermore, the FTC itself can only seek penalties from an employer after the FTC has already issued (and the employer has already violated) a cease-and-desist order (a process which can take considerable time).

We will continue to monitor developments.