Earlier this year, we wrote a blog post about the Federal Trade Commission (“FTC”) issuing its Non-Compete Clause Rule (“Final Rule”) which is meant to prohibit non-competition agreements nationwide.[1] To recap, noncompetition agreements (“non-competes”) generally are provisions in contracts whereby an employee agrees not to enter into competition with an employer after their employment period with that employer is over. This “competition” could be taking a similar role with a competing company, or starting their own company or venture that would compete with the work of their former employer. The FTC’s Final Rule would make such non-competes unlawful, theoretically encouraging competition. The Final Rule was issued on April 23, 2024, and is supposed to take effect on September 4, 2024. However, since it was issued, the Final Rule was challenged with various lawsuits in federal courts by plaintiffs seeking to invalidate the Final Rule before it takes effect. This blog post will briefly discuss two major federal court challenges and their potential effects on the Final Rule.

Shortly after the Final Rule was issued, Ryan LLC, a tax service firm in Dallas, Texas, sued to challenge the Final Rule in the United States District Court for the Northern District of Texas, questioning whether the FTC had the authority to issue the Final Rule (this case, “Ryan”),[2] As part of its suit, the plaintiff filed a motion ahead of the final ruling to stay the effective date of the Final Rule by requesting a preliminary injunction against the FTC. On July 3, 2024, the court granted the motion for preliminary injunction and postponed the effective date of the Final Rule, as it applied to the plaintiffs in the Ryan case. When ruling on this motion, the judge agreed with the plaintiffs that compliance with the Final Rule would cause them to suffer harm in the form of non-recoverable costs, including increased risk that departing workers may take the company’s intellectual property and proprietary methods to its competitors, which it explained cannot otherwise effectively be mitigated by trade secret laws and non-disclosure agreements. In her preliminary ruling granting the injunction, the judge reasoned that the challenge to the measure is “likely to succeed on the merits” and that the public interest weighed in favor of temporarily blocking the Final Rule while the court decides on a final ruling in the case. However, the court also expressly declined the plaintiff’s suggestion to issue a nationwide injunction to non-parties, meaning that the Final Rule is still set to take effect on September 4, 2024 for all other affected employers. While this injunction order is preliminary, the court intends to rule on the ultimate merits of this case and the Final Rule on or before August 30, 2024. Given the reasoning in this preliminary order, though, the judge in the Ryan case is expected to permanently enjoin the FTC from implementing the Final Rule, at least as it pertains to the named plaintiffs.

Meanwhile, a separate challenge was filed in April in the United States District Court for the Eastern District of Pennsylvania (this case, “ATS”).[3] In ATS, ATS Tree Services, the plaintiff, requested nationwide injunctive relief. Similar to the Ryan case, the ATS plaintiff is arguing that the FTC does not possess the statutory authority to create this type of rule, and that the Final Rule exceeds the FTC’s authority to prevent methods of unfair competition. The court heard arguments from ATS Tree Services and the FTC in early July, and on July 23, 2024 denied the plaintiff’s motion to stay the effective date of the Final Rule and preliminary injunction. In its motion, the ATS plaintiff argued the Final Rule would cause it irreparable harm in two ways – first, by incurring nonrecoverable efforts to comply with the Final Rule; and second, by losing the contractual benefits from its existing non-compete agreements.  The court rejected these arguments. As to the first harm, the plaintiff’s nonrecoverable costs fell into three categories: (1) the costs associated with notifying its twelve employees of the change in accordance with the Final Rule’s notice provision; (2) the costs and efforts to review and modify its business strategy; and (3) the costs and efforts of altering its specialized training program. The ATS judge found these harms invalid because it rejected the notion that nonrecoverable compliance costs could be a valid basis for finding irreparable harm (opposing that finding in the Ryan case), and found the costs of the plaintiff notifying its twelve employees that their non-competes were unenforceable, and revising its business strategy, were insignificant. It was less critical of the training argument, but rejected it because it found less evidence supporting the plaintiff’s assertion.  Next, the ATS court rejected the plaintiff’s argument that it would suffer irreparable harm for losing the contractual benefits from its existing non-compete agreements. Primarily, the court found there was no evidence for such an assertion: the plaintiff offered no evidence of any employee leaving or threatening to leave if the noncompete is rendered unenforceable, and offered no evidence of a threat to ATS’s trade secrets. The latter point, it noted, could be addressed with non-disclosure agreements.

The preliminary injunction in the Ryan case, and the denial in the ATS case, demonstrate the uncertainty around whether the Final Rule can ultimately survive legal challenge. One thing is clear from these cases – whether a court finds harm to the plaintiff will be critical to the case. The Ryan court is expected to issue a merit-based decision before the effective date of the Final Rule. Further, there still could be other legal challenges to the Final Rule before and after its effective date. After a decision on the merits in the Ryan case (and any other cases), we will have a better idea of whether the Final Rule survives in any form – as applicable to only the parties of a given case, or on a wider basis to others not before the court in any given case.

[1] FTC Announces Rule Banning Noncompetes, Federal Trade Commission, available at: https://www.ftc.gov/news-events/news/press-releases/2024/04/ftc-announces-rule-banning-noncompetes

[2] Ryan LLC v. Federal Trade Commission, Civil Action No. 3:24-CV-00986-E.

[3] ATS Tree Services, LLC v. The Federal Trade Commission, 2:2024-CV-01743.