On the eve of the Fourth of July, the FTC rule banning most noncompetes is going up in smoke after a federal court in Texas held the US Chamber of Commerce and a tax firm are likely to prevail on their argument that the agency overstepped its authority to adopt the nationwide prohibition.
The decision, on the heels of the US Supreme Court’s ruling reining in federal agency power under the Chevron doctrine, demonstrates the challenge the FTC faces in promulgating substantive regulations dealing with competition in the economy.
Link to Background on the FTC’s Ban and the Subsequent Litigation Background on the FTC’s Ban and the Subsequent Litigation
As detailed in our blog Thirteen Things You Didn’t Know About the FTC’s Noncompete Ban and Five Steps to Prepare Now in Case it Takes Effect, the FTC’s rule banning most post-employment noncompetes was set to take effect on September 4.
However, shortly after the FTC finalized the rule in April, lawsuits challenging the rule were filed in the Northern District of Texas, Eastern District of Texas, and Eastern District of Pennsylvania. The lawsuits all make similar arguments: (1) the FTC exceeded its statutory authority in issuing the rule; (2) the rule is an unconstitutional delegation of legislative power to an administrative agency; and (3) the rule is arbitrary and capricious, with less intrusive means available to fulfill the FTC’s stated goal of stimulating competition in the American economy.
In early May, the Eastern District of Texas lawsuit was stayed and transferred to the Northern District of Texas, which had the first-filed case. Yesterday, Judge Ada Brown (a Trump appointee) delivered on her promise to issue a decision on July 3 – without a hearing – on plaintiffs’ motion for a preliminary injunction seeking to block the regulation.
Link to Impact of Judge Brown’s Decision on US Employers Impact of Judge Brown’s Decision on US Employers
The decision postpones the effective date of the noncompete ban for the plaintiffs in this litigation. It states that plaintiffs are likely to succeed on the merits of their case and that blocking the rule temporarily is in the public interest. However, Judge Brown denied plaintiffs’ request to block the rule nationwide, saying it was not clear whether such an order was appropriate. She wrote: “[w]hile this order is preliminary, the Court intends to rule on the ultimate merits of this action on or before August 30, 2024.” Thus, a decision on the scope of the injunction is expected next month, but the case will likely continue through the judicial system via appeals even after that decision is issued.
The FTC does not show signs of backing down. In a statement following the decision, a spokesperson said the agency’s authority is supported by both statute and precedent.
The takeaway: while the rule is paused for the plaintiffs in the Texas lawsuits, uncertainty remains for all other employers.
We outlined five summer “to-dos” for employers here and these recommendations stand. And while yesterday’s decision may be a harbinger of further successful challenges to the FTC’s authority, particularly in light of SCOTUS’s Chevron ruling employers must still heed the other laws attacking the use noncompetes as a tool to protect trade secrets, confidential information and investments in recruiting and training workers. For instance, state legislators in California, Minnesota, Oklahoma and North Dakota have already banned noncompete agreements, and at least a dozen other states have passed laws limiting their use. As such, we recommend partnering with counsel to identify alternatives available for protecting key business assets. Please connect with your Baker McKenzie attorney for more.