As discussed in our previous article, the Federal Trade Commission’s (“FTC”) newly enacted Non-Compete Clause Rule (“Rule”) is set to go into effect on September 4, 2024, by its own terms. The Rule would virtually ban all non-compete agreements for nearly all workers of for-profit employers.

The Rule is facing intensified legal challenges as its effective date is now less than 40 days away. Lawsuits were filed against the FTC in federal district courts in Texas, Pennsylvania, and Florida. Plaintiffs in those three cases raised similar legal arguments and sought injunctive relief and a stay of the Rule’s effective date.

So far, two different federal district courts have issued two different decisions on legal challenges to the Rule. In Ryan LLC v. Federal Trade Commission, a federal district court in Texas found that plaintiffs were likely to prevail on the merits of their claim that the FTC lacked authority to issue the Rule and granted a limited preliminary injunction preventing enforcement of the Rule against the named plaintiffs in that case. However, when presented with the same legal arguments, a federal district court in Pennsylvania in ATS Tree Services, LLC v. Federal Trade Commission refused to issue any injunction to the plaintiff, holding that the FTC had the statutory authority to issue the Rule.

Texas District Court’s Decision

On July 3, 2024, in Ryan LLC v. Federal Trade Commission, the U.S. District Court for the Northern District of Texas issued a limited, preliminary injunction staying enforcement of the Rule against the named plaintiffs before the court.

In issuing an injunction, the Texas district court made four key findings. First, the Ryan court concluded that plaintiffs were likely to succeed on the merits that the FTC does not have the statutory authority to promulgate the Rule. Second, the Ryan court found there was a substantial likelihood that the Rule is arbitrary and capricious because the FTC provided no reason for the Rule’s broad application and “one-size-fits-all” approach with no end date. Third, the Ryan court held that the named plaintiffs would likely suffer irreparable harm if the Rule takes effect because they would incur nonrecoverable compliance costs. Last, the Ryan court held that an injunction would serve the public interest in maintaining the status quo and preventing the substantial economic impact that would likely result if the Rule takes effect.

Importantly, the Ryan court declined to issue a nationwide injunction, limiting the scope of the injunctive relief to the named plaintiffs (including Ryan LLC, U.S. Chamber of Commerce, Business Roundtable, Texas Association of Business, and Longview Chamber of Commerce, but not including the individual members of the trade associations). For all other employers, the Rule will still take effect on September 4, 2024 unless halted by pending or subsequent legal challenges.

Although the preliminary injunction applies only to the Ryan plaintiffs, the Texas district court’s decision casts serious doubt as to whether the Rule will ever go into effect. The Ryan court may vacate the Rule in its entirety. The Ryan court is set to issue a final decision on the merits on August 30, 2024, just days before the Rule’s September 4 effective date.

Pennsylvania District Court’s Decision

On July 23, 2024, in ATS Tree Services, LLC v. FTC, the U.S. District Court for the Eastern District of Pennsylvania reached contrary conclusions than the Ryan decision. First, the Pennsylvania district court found that ATS failed to show immediate and irreparable harm to justify imposition of injunctive relief. The ATS court noted that monetary loss and business expenses alone are insufficient bases for injunctive relief under the Third Circuit’s precedent. In addition, the ATS court held that the possibility that ATS would scale back its training and investment in employees is “too attenuated to constitute an immediate, irreparable harm” and is not mandated by the Rule.

Second, the ATS court held that even if ATS had shown irreparable harm it was not likely to succeed on the merits because the FTC had authority to issue the Rule. The ATS court found that the FTC has statutory authority to promulgate substantive rules as to unfair methods of competition. The ATS court relied on the FTC’s authority to “prevent” unfair methods of competition, which is an “inherently forward-looking directive,” and therefore contemplates substantive rulemaking. Additionally, the ATS court found that the FTC acted within its authority in designating all non-compete clauses as “unfair methods of competition” and “a rule-of-reason analysis is not proper in this context.” The court also rejected ATS’s arguments relating to federalism, the “Major Questions Doctrine,” and the constitutionality of Congress’s delegation of authority.

The ATS court’s holdings directly contradict the Ryan court’s rulings. The ATS court, however, did not address the Ryan court’s decision.

Other Legal Challenges

A third challenge to the Rule, Properties of the Villages v. Federal Trade Commission, No. 5:24-CV-00316 (June 21, 2024), is pending in the U.S. District Court for the Middle District of Florida. The plaintiff has moved for an injunction against the FTC’s enforcement of the Rule and a stay of the effective date pending the litigation. The Florida district court has not ruled on that motion.

Future Implications

In light of the Texas district court’s limited preliminary injunction and the Pennsylvania district court’s refusal to issue any injunction, it seems that a nationwide injunction is unlikely to come from a federal district court. It is highly likely that the losing party in any of the pending challenges would appeal, especially in light of the Ryan and ATS courts’ contrasting preliminary rulings. The dispute will likely ascend to the Third and Fifth Circuits, respectively, setting up a potential circuit split that will likely be reviewed by the U.S. Supreme Court in the coming months. Given the U.S. Supreme Court’s landmark decision in Loper Bright Enterprises v. Raimondo, where the Supreme Court categorically overturned the Chevron deference doctrine, the Supreme Court can be expected, at minimum, to cast a skeptical eye on the Rule. Furthermore, given the U.S. Supreme Court is on summer recess until October, any injunction the U.S. Supreme Court may issue will come after the Rule takes effect.

Right now, the Rule is still scheduled to become effective on September 4, 2024. Employers should continue to take steps to prepare for compliance, including, at a minimum, auditing agreements containing non-compete provisions, identifying “senior executives” defined under the Rule, and working with counsel to prepare and ready notices required by the Rule. Employers should also consider alternative options to better protect their interests, such as non-solicitation agreements, non-disclosure agreements, invention protection, trade secret audits, training repayment programs, garden leaves, and non-competition agreements entered into in connection with sales of businesses.

Written with the assistance of Alexis Cashman and Ann Van Hout, summer associates at Husch Blackwell’s Milwaukee office.