As discussed in our prior legal update, on July 3, 2024, the U.S. District Court for the Northern District of Texas issued a preliminary injunction in Ryan, LLC v. Federal Trade Commission, temporarily enjoining the FTC’s rule banning non-competes for workers nationwide, subject to limited exceptions (the Non-Compete Rule). The court found the FTC exceeded its statutory authority in promulgating the Non-Compete Rule. However, that court declined to extend the injunction beyond the plaintiffs in that case.
The second ruling is now in, and the U.S. District Court for the Eastern District of Pennsylvania issued in ATS Tree Services, LLC v. FTC has declined to block the Non-Compete Rule. The ATS Court found that the plaintiff failed to show it would be irreparably harmed by the Non-Compete Rule and that the FTC had the authority to issue the Non-Compete Rule.
In other words, the ATS Court and the Ryan Court have reached opposing decisions, causing significant uncertainty regarding the validity of the FTC’s Non-Compete Rule. This Legal Update explains the highlights of the ATS ruling, the anticipated next steps, and what employers can do now.
Highlights of the ATS Ruling
ATS made the following findings in refusing to enjoin the Non-Compete Rule:
- ATS failed to show that they would suffer irreparable harm sufficient for an injunction because the Non-Compete Rule did not have “peculiar” non-recoverable compliance costs (such as the costs associated with notifying ATS employees of the Non-Compete Rule, reviewing and modifying ATS’s business strategy, making changes to ATS’s specialized training program, and attorneys’ fees). Additionally, ATS failed to provide any evidence that its employees planned to resign if the Non-Compete Rule went into effect.
- Next, the Court ruled that even if ATS had established irreparable harm, ATS would still be unable to demonstrate a likelihood of success on the merits. The Court found that the FTC had both procedural and substantive authority to promulgate the Non-Compete Rule because there nothing is limiting the FTC’s power to procedural rules only.
- Finally, the Court found that the FTC did not exceed its authority in making a rule banning all non-competes for several reasons: (1) the FTC acted within its authority when it designated all non-compete clauses as “unfair methods of competition”; (2) individual states retain the ability to regulate non-competes so long as they don’t conflict with the Non-Compete Rule; (3) the major questions doctrine (which effectively directs courts to reject governmental agencies’ interpretations on questions involving national economic or political significance unless there is clear statutory authority from Congress to accept them) did not apply because there were previous situations where the FTC promulgated substantive rules to prevent unfair methods of competition; and (4) Congress properly delegated authority to the FTC permitting FTC to make rules preventing unfair methods of competition.
What Happens Next
ATS’s ruling creates a split between federal courts with respect to the Non-Compete Rule. Although the ATS ruling is undoubtedly a win for the FTC, it may be short-lived given the Ryan Court is still set to issue a final decision on whether to grant a permanent nationwide injunction on or before August 30, 2024, after the parties complete briefing on the merits, and just five days before the Non-Compete Rule is slated to take effect. In the meantime, a third challenge to the Non-Compete Rule was recently filed in the U.S. District Court for the Middle District of Florida, and on August 14, 2024, that court issued an order finding the FTC did not have the authority to issue such a broad ban on non-competes; however, the written opinion has not yet been issued and it appears the relief may only apply to the plaintiff who brought the suit. Therefore, as of the date of this Legal Update, the Non-Compete Rule is still slated to take effect on September 4, 2024.
What Employers Should Do Now
Until a court grants nationwide injunctive relief or otherwise vacates the Non-Compete Rule, employers should continue taking steps to prepare for the Non-Compete Rule to go into effect on September 4, 2024, including assessing whether to begin preparing notices to employees in the event the Non-Compete Rule is not struck down. We recommend the following:
- Take inventory of which employees (both former and current) have signed employment covenant agreements containing non-compete provisions.
- Prepare a notice compliant with the Non-Compete Rule that can be circulated to your non-senior executive employees prior to the effective date of the Non-Compete Rule, assuming the Non-Compete Rule is not enjoined by that date.
- Take inventory of your existing employment covenant agreements to ensure they contain adequate protections outside of non-competes, including non-disclosure provisions, non-solicitation provisions, and provisions governing the ownership and assignment of intellectual property.
- Ensure that your c-suite level employees have signed enforceable non-compete agreements.
- Decide whether to include non-compete provisions in agreements with non-executive employees on a go-forward basis, with the understanding that you will need to provide employees notice that such provisions are enforceable prior to the effective date of the Non-Compete Rule, assuming the Non-Compete Rule is not enjoined by that date.
- Ensure that you have a severability clause in your current or future employment covenants agreements that contain noncompete provisions so that the other restrictive covenants remain intact if the Non-Compete Rule goes into effect.
- Ensure that your customer non-solicitation provisions are not drafted so broadly that they could be deemed to constitute an unenforceable non-compete provision.
- Assess the level of restrictions that are necessary to protect your business while allowing you to remain competitive in the market and attract new talent, given that a decreased tolerance for non-competes is likely even if the Non-Compete Rule is not ultimately implemented.
The MMM Employment Team continues to monitor developments related to the Non-Compete Rule, including the decisions regarding the various legal challenges. For questions about the Non-Compete Rule, non-compete agreements, other restrictive covenant agreements in general, and recommended strategies for maximizing protection of your Company while remaining competitive in the field, please contact the MMM Employment Team.
