The Federal Trade Commission’s (FTC) attempt at a nationwide ban on employee non-compete agreements suffered its first setback last week when a Texas federal district court preliminarily enjoined enforcement of the rule. While the ruling is limited to the plaintiffs in that case, the decision is a roadmap for similar legal challenges. The court also indicated that it would be fast-tracking a final ruling on the merits, which could involve a broader, nationwide injunction when it is issued before the end of August.
We wrote previously about the breadth of the FTC rule, which attempts to ban nearly all non-compete agreements effective September 4, 2024, and the likelihood that legal challenges to the rule would be successful in limiting or entirely preventing its implementation. The first lawsuits against the FTC were filed in Texas federal courts the day the rule was announced by plaintiffs Ryan LLC and a group of business and industry groups led by the Chamber of Commerce of the United States of America (U.S. Chamber). The plaintiffs each separately moved for preliminary injunctions, i.e., orders barring the FTC from enforcing its rule while the plaintiffs’ claims are pending, and those motions were considered by one judge.
On July 3, the court granted both motions, ordering that the FTC may not enforce the non-compete rule against Ryan LLC or the U.S. Chamber until the court issues its final decision on the merits.
The heart of the case involves the FTC’s authority to issue the non-compete rule under two sections of the Federal Trade Commission Act (FTC Act), sections 5 and 6(g). Broadly, section 5 authorizes the FTC to prevent both “unfair and deceptive trade acts or practices” and “unfair methods of competition” under a scheme that includes the power to conduct investigations, issue cease and desist orders, and enforce those orders. It also separately authorizes the FTC to initiate court proceedings to impose civil penalties for violations of its orders and, in some cases, for violations of its rules. Section 6(g) authorizes the FTC to make rules and regulations for the purposes of carrying out the provisions of the FTC Act.
The court concluded that the non-compete rule is substantive rather than procedural and that Congress did not give the FTC the authority to promulgate substantive rules concerning “unfair methods of competition” (versus “unfair or deceptive trade acts or practices”). The court determined that section 6(g) is a “housekeeping statute” authorizing only the adoption of rules and regulations concerning FTC procedure or practice. Based on the court’s conclusion that the FTC exceeded its authority in promulgating the non-compete rule, it also concluded that the plaintiffs were likely to succeed on the merits of their claims and accordingly issued a preliminary injunction.
The scope of the ordered injunction is narrow. While the court declined to issue preliminary relief beyond the parties, the decision notes several times that certain issues, including the appropriateness of a nationwide injunction and the associational standing of the U.S. Chamber’s members, had not been thoroughly briefed by the plaintiffs. This seems to be an open invitation for the plaintiffs to provide the court with a more thorough analysis supporting a broader injunction in future briefing.
In the meantime, two other cases are proceeding in federal district courts in Pennsylvania and Florida. Oral argument on a motion for preliminary injunction requested in the Pennsylvania case took place on July 10. That court intends to issue a decision on preliminary relief by July 23. The timing for a decision on a similar motion in the Florida case has not yet been set.
The fate of the FTC non-compete rule will become clearer as the summer progresses and the anticipated decisions are issued. More lawsuits are likely to be filed if the courts decline to issue nationwide injunctions. In the meantime, employers should continue to review the restrictive covenants they currently have in effect with workers and to explore alternatives to non-competes that will protect their interests.
Employers should also be aware that the consequences of non-compliance with the FTC non-compete rule appear to be limited based on the Texas court’s analysis of the relevant statutory language. The FTC only has authority to seek civil penalties of up to $10,000 per violation in response to violations of its rules concerning unfair or deceptive trade acts or practices. The court concluded that the non-compete rule is expressly based on the FTC’s finding that non-competes are an unfair method of competition. That likely means that even if the non-compete rule goes into effect, the FTC would not be able to impose civil penalties against an employer unless and until it first issued an administrative complaint, held a hearing, issued a cease and desist order, and that order became final (meaning that the time to appeal expired or that all appeals have been exhausted). At that time, if the employer violated the final cease and desist order, the FTC could then file a lawsuit asking a court to award it civil penalties.
We will continue to monitor the progress of these legal challenges.