Conflicting Orders Create Uncertainty for FTC Noncompete Ban

On April 23, 2024, the Federal Trade Commission finalized its rule enforcing a noncompete ban for a vast majority of workers. The noncompete ban is set to take effect on September 4, 2024. With limited exceptions, the rule invalidates existing noncompete clauses and bans new noncompete clauses.

On the same day, Ryan, LLC filed suit against the FTC alleging that the rule was unlawful which was then enjoined by the U.S. Chamber of Commerce, the Business Roundtable, the Texas Association of Business, and the Longview, Texas Chamber of Commerce. This lawsuit was filed in opposition to the FTC Rule arguing that the FTC lacks substantive rule making authority. See Ryan, LLC v. Federal Trade Commission (No. 3:24-cv-00986)(N.D. Tex. 2024).

Amidst these challenges to the FTC’s ruling, in a separate case, the Supreme Court overruled 40-year-old precedent which gave federal agencies discretion to interpret ambiguous laws called the “Chevron Doctrine” and has now afforded this discretion to the Courts. See Loper Bright Enterprises v. Raimondo (No. 22-451)(U.S.).

Soon after the overruling of Chevron, in Ryan, Judge Ada Brown of the U.S. District Court for the Northern District of Texas, issued an order granting Plaintiffs’ motions for (1) a stay of the effective date of the FTC ban and (2) a preliminary injunction with respect to implementation or enforcement of the FTC ban but only for the specific Plaintiffs in Ryan. The Court reasoned that the Plaintiffs are likely to succeed in establishing that the FTC lacks rule-making authority to issue the rule and that the ban is overly broad.

However, on July 23, 2024, Judge Kelley Brisbon Hodge of the U.S. District Court for the Eastern District of Pennsylvania denied Plaintiff’s motion for a preliminary injunction seeking an injunction staying the effective date of the FTC’s ban. The Court found that the Plaintiffs failed to (1) demonstrate that it would suffer irreparable harm because of the ban and (2) establish a reasonable likelihood of success on the merits. See ATS Tree Services LLC v. Federal Trade Commission (No. 2:24-cv-01743-KBH)(E.D. Pa. 2024).

With judges in both the Northern District of Texas and the Eastern District of Pennsylvania issuing conflicting orders and citing to Loperbright, the true effect of Loperbright on agencies such as the FTC, remains uncertain. Although the FTC’s ban on non-competes is set to go into effect on September 4, 2024, both cases will likely be appealed and could result in a circuit split leading to review by the Supreme Court. If this issue reaches the Supreme Court, there may be more clarity on the role of Loperbright for these agencies.

As of now, employers should continue to review their noncompete agreements and stay updated on any legal challenges that may arise in the coming weeks.

This article was co-authored by Madison Willmott, a summer associate with Rivkin Radler.