As the Federal Trade Commission (FTC) seeks to ban nearly all employee non-compete agreements in the United States (see April 25, 2024 Alert), the question of whether the agency has the power to do that is dividing federal courts around the country. We wrote previously about two court decisions disposing of motions for preliminary injunctions: a Texas federal court sided with the challengers (see July 10, 2024 Alert) and a Pennsylvania federal court sided with the FTC (see July 26, 2024 Alert). Last week, a federal court in Florida joined the fray by declaring that the FTC likely did not have the power to ban non-compete agreements, relying on a different legal theory than the Texas court. The Florida court issued an injunction but, like the injunction issued by the Texas court, it applies only to the specific plaintiffs in the lawsuit. The FTC’s position, so far, is that the rule will go into effect on September 4, 2024, for all employers within the FTC’s jurisdiction except for the plaintiffs in the Texas and Florida cases.
All three courts that have addressed the issue agree on the high-level legal framework: Administrative agencies like the FTC may only enact rules when Congress has authorized them to do so. The Texas court held that the Federal Trade Commission Act (FTC Act) did not give the FTC the authority to pass substantive rules to govern “unfair methods of competition” and therefore held that Congress did not authorize the FTC to ban non-compete agreements as unfair methods of competition. The Pennsylvania court held that the statute did, in fact, allow for such regulations, and that the regulations were a reasonable exercise of the broad authority that Congress gave the FTC.
The Florida court followed the Pennsylvania court almost all the way. It held that:
- The FTC Act allowed the agency to pass rules to prevent “unfair methods of competition;”
- The rule did not violate the Constitution’s Commerce Clause;
- The rule did not violate the constitutional requirement of separation of powers or non-delegation of Congress’ authority;
- The rule did not offend constitutional concepts of federalism by encroaching on the States’ authority; and
- The rule was not improperly retroactive.
The Florida court then took the analysis a step further, however, finding merit in the plaintiff’s argument that the rule was subject to the “major questions” doctrine.
The court framed the issue this way:
The major questions doctrine is the name recently given to a long-standing principle governing the interpretation of statutes conferring power on administrative agencies. The principle is this: When an agency claims to have the power to issue rules of “extraordinary … economic and political significance,” it must “point to ‘clear congressional authorization’ for the power it claims.”
The doctrine assumes, as is true here, that the FTC’s reading of its authority under Section 6(g) [of the FTC Act] is plausible, but requires more, given the significant consequences of the rule.
In other words, the court noted, if the FTC non-compete rule has “vast economic and political significance,” then the major questions doctrine requires Congress to “state its intention to confer that power clearly and unambiguously.”
The court concluded that the rule indeed had such economic and political significance given that (1) the FTC itself estimated approximately 30 million workers in the United States are subject to a non-compete that would be impacted by the rule, (2) employers might pay between $400 billion and $488 billion more in wages over 10 years under the rule, and (3) the rule was seeking to regulate in an area that had previously been the province of the states (and indeed would preempt state laws on the subject). Given the “sweep and breadth of the final rule, including its application to existing contracts,” the court concluded that the plaintiff met its burden of showing that the major questions doctrine was implicated.
Next, the Florida court concluded that although the FTC Act does contemplate that the FTC might properly do things that would have a vast impact on the economy, Congress had not, in Sections 5 and 6(g) of the FTC Act, “rendered a sufficiently clear expression of legislative intent to authorize the final [non-compete] rule.” That conclusion seemed to rest heavily on the fact that the FTC had historically not issued substantive rules under Section 6(g) and indeed had “never even brought non-compete enforcement actions until it announced some consent decrees literally the day before it announced its Notice of Proposed Rulemaking.” The court used the following example to demonstrate its rationale:
[I]if a parent gives a babysitter a credit card and says ‘make sure the kids have fun while we’re out,’ the parent might expect that the babysitter would take the kids out for ice cream, but would not expect the babysitter to take the kids on an overnight trip to Las Vegas. Likewise here: Without clear Congressional permission, the final rule, the FTC’s equivalent of a trip to Las Vegas, is unauthorized.
The Florida court took pains to note that, like the Texas court, it was not entering a stay of the non-compete rule generally or nationwide, but only as to the actual plaintiff in the case.
With this decision, the score is now 2-1 in favor of challengers to the non-compete rule. We next expect to hear from the Texas court again, which has promised to issue a final decision on the merits of that case by August 30. It is unlikely the Texas court will reverse its preliminary conclusion that the non-compete rule cannot be enforced against the parties to that case; the bigger question is whether the court will expand its injunction beyond the specific plaintiffs in its case to apply to non-parties. What is clear is that no matter how each of these district courts rule, appeals will follow and the fate of the non-compete rule will remain in limbo for quite some time.
In the meantime, as we have noted before, the immediate consequences of non-compliance with the rule appear to be limited. Because the FTC expressly based its rule on a finding that non-competes are an unfair method of competition under Section 6(g) (rather than “unfair or deceptive acts or practices” under Section 5), the FTC does not have the power to impose civil penalties against an employer unless and until it has worked through an administrative process that has resulted in the issuance of a final cease and desist order. If the employer subsequently violates that final cease and desist order, the FTC could then file a lawsuit asking a court to award it civil penalties.
Employers with non-compete agreements should discuss these issues with their attorneys in order to make the best decisions possible in this dynamic environment.