BREAKING NEWS: Texas federal court invalidates Federal Trade Commission’s near total ban on employment non-compete clauses and another federal court weighs in – Technologist

By Greg Care

It has been a tough week for the Federal Trade Commission (FTC) and employees hoping to see broad relief from employment non-compete clauses as new court decisions have been made. One ruling has set aside, on a nationwide basis, the FTC’s rule prohibiting nearly all non-competes. As discussed below, this likely means that the disputes will now be elevated to the appellate courts and, for the time being, non-competes will be evaluated based on state law.

In April 2024, the FTC issued a regulation that, except in limited circumstances, made it illegal for employers from prevent their employees from working for or owning a business that is engaged in essentially the same work they did for the employer. The regulation was to go into effect on September 4, 2024. As discussed in a prior blog, legal challenges came swiftly, resulting in a mixed bag of rulings: a federal court in Texas found that the challengers of the FTC’s rule would likely prevail in invalidating it, granting just those plaintiffs preliminary relief from complying with the rule, while a federal court in Pennsylvania found the opposite. In the last six days, two new rulings have presented momentous questions for the fate of the FTC’s rule.

In a highly anticipated ruling yesterday, the Texas federal court (Ryan LLC v. Federal Trade Commission, No. 3:24-CV-00986-E (N.D. Tex.)) made a final decision that greatly expanded the relief it gave the plaintiffs in the above-mentioned preliminary decision. Resolving the plaintiffs’ and the FTC’s motions for summary judgment, the Court found that “the FTC exceeded its statutory authority in implementing the Rule, and the Rule is arbitrary and capricious.” On the former point, it seems clear that the Court believes that the FTC lacks authority to substantively regulate non-competes in the first place as opposed to finding that the FTC had the authority but overstepped it. Indeed, the Court’s reasoning was virtually the same as that of its prior ruling (i.e., Congress empowered the FTC to issue only procedural rules regarding unfair methods of competition rather than substantive ones; and that the FTC rule was too sweeping in its scope, based on inconsistent and flawed empirical evidence, did not consider the positive benefits of non-compete agreements, and disregarded evidence supporting non-competes). What was significantly different was the scope of the relief the court granted. While the preliminary ruling applied to just the plaintiffs in that case, the Court’s final decision yesterday stated that the invalidity of the FTC’s rule applied on a nationwide basis. This was somewhat of an “about-face” from the Court’s prior two rulings on that issue, surprisingly relying on cases it has previously cited as reason to deny such relief. However, since the final decision was that the FTC’s rule violated the Administrative Procedure Act, which calls for invalid rules to be “set aside,” the Court found that there would be to reason to limit the ruling to just these plaintiffs. The net result is that the FTC’s rule, otherwise set to go into effect in a few weeks for employees across the country, is now indefinitely on hold.

In addition, just a few days before, a federal court in Florida (Properties of the Villages, Inc. v. Federal Trade Commission, No. 5:24-cv-00316 (M.D. Fla.)) added another ruling on the FTC’s regulation, also finding against the FTC but on a different basis. In an oral ruling on August 14, Chief Judge Timothy J. Corrigan granted a preliminary injunction that excused the plaintiff from complying with the FTC’s regulation. Contrary to the decision in the Texas case, Chief Judge Corrigan did not find it was substantially likely that he would ultimately rule that the FTC did not have the authority to issue the non-compete rule. While the plaintiff presented arguments with “some force” that the text, structure, and history of the FTC Act did not support the FTC’s authority, the Court concluded that nothing in the FTC Act limited the FTC to issuing procedural as opposed to substantive rules. Next, the Court addressed arguments not decided in the other cases to date, finding that there was no constitutional issue with the FTC’s rule. Penultimately, the Court also rejected arguments that not all non-competes are unfair competition, that non-competes are in the core domain of state regulation, and that the rule is improperly retroactive. However, Chief Judge Corrigan finally found reason to issue the preliminary injunction in favor of the plaintiff on the basis of an issue that was not a focus in the other cases: the “major questions doctrine.” In essence, the Court found that the FTC has the authority to issue substantive regulations to prevent unfair competition, but that the “extraordinary . . . economic and political significance” of this particular issue required the FTC to have more specific and clear authority from Congress than it had, especially where there is already significant state regulation of the issue and no other federal regulation of it. 

Meanwhile, in the Pennsylvania case (ATS Tree Services, LLC v. Federal Trade Commission, No. 2:24-cv-01743 (E.D. Pa.)), the parties have submitted their proposal for briefing summary judgment, which would almost certainly be the final word in the case. The parties have requested that the briefing be complete by October 25, 2024, and that a decision follow a month later. The Court has not yet entered an order.

While the nationwide effect of the decision in the Texas case may, at first glance, suggest that the decisions in the Florida and Pennsylvania cases are moot, they remain an important part of the landscape moving into the appeals that are likely to come. At present, there is: (1) a decision in Texas invalidating the rule, (2) a decision in Florida invalidating the rule, and (3) a decision in Pennsylvania vindicating the rule. These represent three different jurisdictions with three different appellate courts (the 5th, 11th, and 3rd Circuits, respectively), each with a slightly different mix of rationales. Since the non-compete rule was a significant policy objective for FTC Chair Lina Khan and the Biden Administration, the FTC will likely pursue appeals. If those appeals produce conflicting results, they present what some might argue is a “circuit split” (an undesirable difference in legal conclusions) that would serve as a basis for the U.S. Supreme Court to accept an appeal to resolve the split. Given the Supreme Court’s recent skepticism of the reach agencies having in rulemaking and the deference owed to their interpretations of the law (as seen in Loper Bright Enterprises v. Raimondo, which the Texas and Florida courts noted), the FTC’s opponents will likely feel good about their chances.

We will be following these developments but, in the meantime, the abiding focus remains on how state law deals with non-competes. This is done both by statute, which may ban or limit non-competes, or court decisions that apply common law to decide the reasonable bounds of non-competes in a particular situation. Parsing that state law can be tricky. So, it remains important to follow local and state developments and obtain competent counsel on whether and how a non-compete may be enforced in a case-specific situation.

If you have questions regarding non-competes in your situation, please contact us today to see if we can assist with your particular circumstances.

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