Background: Earlier this year we reported on the FTC’s Final Rule banning non-competes—a final rule which will have drastic effects for employers and employees alike should the rule go into effect on September 4, 2024. In support for calling for a sweeping prohibition on both existing and future non-competes, the FTC argues that non-competes hinder competition, prohibit workers from seeking other employment opportunities, depress wages and other employment terms and conditions, and otherwise discourage pro-competitive practices. While the Final Rule will certainly have extensive impact if implemented, two suits currently in federal courts challenge the legitimacy of the rule. The outcome of these suits, and similar litigation to follow, will determine whether the Final Rule stands and will go into effect later this year.

Ryan, LLC v. Federal Trade Commission (“Ryan”): The Ryan plaintiffs challenged the Final Rule in the Northern District of Texas, arguing that the FTC overstepped its rulemaking authority, acting far beyond its scope without clear congressional authority. On July 3, the plaintiffs were rewarded with a partial victory: Judge Ada Brown preliminarily enjoined enforcement of the Final Rule pending a decision on the merits.

Judge Brown noted that preliminary injunctions (“PIs”) are to be issued judiciously, and the burden for granting a PI is high. The moving party must demonstrate: “(1) A substantial likelihood of success on the merits; (2) a substantial threat of irreparable harm in the absence of preliminary relief; (3) that the balance of equities tips in the movant’s favor; and (4) that the injunction serves the public interest.” The high bar prescribed by courts to grant a PI makes it even more notable that Judge Brown found the Ryan plaintiffs proved their case—at least for now.

Judge Brown was unpersuaded by the FTC’s argument that Section 6(g) of the FTC Act provides the basis for the FTC’s power. In disagreeing, Judge Brown found that Section 6(g) confers “housekeeping” powers, not the power to implement a substantive rule with such drastic economic ramifications. Further, Judge Brown found the FTC’s promulgation of the rule to likely be arbitrary and capricious, noting that, when an agency uses its rulemaking power to promulgate a rule, that rule must abide by the rulemaking process and must be supported by reasoned, analyzed evidence presented from both sides. The agency must consider less burdensome alternatives, the impact of the rule, and competing policy concerns. Judge Brown found the FTC had likely failed to gather or analyze the extensive body of necessary evidence prior to promulgating the Final Rule. Of course, the FTC could appeal the PI, with an appeal likely due by August 2, 2024.

A Partial Win: While the PI was granted, the scope of the injunction was narrower than the plaintiffs wanted. Judge Brown made clear that the PI was not a nationwide injunction—rather, it would apply only to the Ryan plaintiffs. Judge Brown noted that the circumstances of the matter did not qualify as an “appropriate circumstance” to merit nationwide relief, demonstrating that, while she presumptively views the claim as likely to succeed on the merits, the battle is far from over as the September effective date draws near.

Beyond rejecting a nationwide injunction, Judge Brown also denied plaintiff-intervenor, Chamber of Commerce’s, request for associational standing for their members, declining to entertain the Chamber’s argument that it was in the member entities’ best interest to be covered by the PI. In her July 3 opinion, she noted that the parties did not adequately brief the associational standing issue, and nothing presented on the record convinced her to extend PI to the members of the Chamber. Judge Brown further solidified her ruling when she considered, and denied, plaintiff and the Chamber’s motion for reconsideration on the scope of the PI and the issue of associational standing, which would have permitted redress for the Chamber’s members.

While the scope of Judge Brown’s PI is at least clear, the question remains will her forthcoming decision on the merits have nationwide impact? Judge Brown intends to issue a decision on the merits by August 30. However, should either side appeal the PI, the district court merits proceeding would likely be stayed pending resolution of the appeal, leaving the ultimate question open.

ATS Trees Services v. Federal Trade Commission (“ATS”): Since Judge Brown’s grant of a PI in Texas, on July 23, 2024 Judge Kelley Brisbon Hodge in the Eastern District of Pennsylvania denied a PI to a different plaintiff challenging the FTC Final Rule, finding that the plaintiff failed to demonstrate irreparable harm as well as demonstrate the likelihood of success on the merits. First, Judge Hodge found that ATS’s arguments regarding harm were “too attenuated to constitute an immediate, irreparable harm,” noting that ATS’s articulated fear that because employees may leave, ATS would need to scale back their training program was too speculative. Second, and importantly, Judge Hodge cited to the Supreme Court’s recent opinion in Loper Bright Enterprises v. Raimondo in determining that ATS was likely to fail on the merits. Although Loper Bright was issued by the Supreme Court after the parties in ATS had fully briefed the PI Motion, Judge Hodge followed Loper Bright’s guidance that courts must “independently interpret the statute and effectuate the will of Congress subject to constitutional limits” when interpreting a statute’s delegation of discretionary authority to an agency.

Judge Hodge found that, when read together, Sections 5 and 6(g) authorize “the FTC to promulgate ‘rules and regulations’ as one of its tools to prevent unfair methods of competition.” Judge Hodge conducted statutory interpretation by means of an analysis of the plain language as well as an analysis of the history of the act. This adverse decision against the plaintiff in the ATS case will likely be appealed to the Third Circuit, which could set up a circuit split between the Fifth and Third Circuits and ultimately review by the Supreme Court.

What to Do: The Ryan and ATS decisions create uncertainty about the Final Rule and raise a number of questions for employers. For example, how should employers interpret the conflicting orders? Should employers begin preparing for the Final Rule to take effect? Will a decision on the merits in Ryan, even if decided in favor of the plaintiffs, lead to nationwide relief? If nationwide relief is not effectuated, will employers be left on their own to file for relief against the Final Rule? These questions and others are unanswered as we await the courts’ merits decisions in Ryan and ATS. For now, we recommend employers take stock of the non-compete agreements that they have in place and identify those that qualify as being applicable to senior executives so that they are prepared to move forward with complying with the Final Rule if it survives the pending legal challenges and becomes effective.

Hunton Andrew Kurth’s attorneys are actively tracking the status of the litigations and will strive to provide the most up-to-date advice to clients. Please reach out to us for guidance if you have any questions.