As widely predicted, U.S. District Court Judge Dana Brown granted Ryan, LLC’s motion for a preliminary injunction against the Federal Trade Commission’s (FTC) Final Rule banning noncompetes. In her July 3, 2024 opinion, Judge Brown found that the FTC “lacks substantive rulemaking authority with respect to unfair methods of competition.” She also enjoined the FTC from implementing or enforcing the Final Rule against the parties in that case, which included the plaintiff Ryan, LLC, the U.S. Chamber of Commerce and the Business Roundtable.
But while employers may cheer that decision, their noncompetes are not out of the proverbial woods yet. To date, Judge Brown has declined to issue a nationwide injunction prohibiting the FTC from enforcing its rule against other parties. This means that the FTC may still try to enforce its Final Rule against other employers who are not parties to that lawsuit. The FTC’s Final Rule becomes effective Wednesday, September 4, 2024 and it requires employers to provide a notice to current and former employees that their noncompetes are no longer enforceable. Given that impending deadline, many employers are concerned about the uncertainty left by Judge Brown’s decision. However, as explained below, the Final Rule may provide cover for employers under a “good faith” exception.
Quick Background: On April 23, 2024, the FTC announced its Final Rule banning noncompetes (for more on the Final Rule, see my earlier blog post). That afternoon, a tax services and software provider called Ryan, LLC filed a lawsuit in federal court in Dallas, Texas challenging the Final Rule. Shortly after that, the U.S. Chamber of Commerce, Business Roundtable, Texas Association of Business and Longview Chamber of Commerce joined that lawsuit, seeking the same relief. Those parties asked Judge Brown to enjoin the FTC from enforcing the Final Rule
On July 3, 2024, Judge Brown issued a preliminary injunction against the rule, reasoning that the FTC lacked authority to promulgate the Rule and finding that the FTC’s “expansive ban” was arbitrary and capricious. For those interested in a thorough analysis of Judge Brown’s opinion, see Seyfarth’s Jesse Coleman and Katherine Perrelli’s take on the decision, as well as Russell Beck’s analysis found here.
But while Judge Brown rejected the FTC’s Final Rule, she declined to issue a nationwide injunction, simply stating that she did not feel the circumstances were “appropriate” for nationwide relief. Shortly after that decision (July 10), Ryan, LLC and the other plaintiffs moved for reconsideration of her ruling denying a nationwide injunction, but Judge Brown issued a very short order the next day denying that request.
Judge Brown has notified the parties that she will issue a final ruling and permanent injunction (if any) on August 30, 2024. If her recent decisions are any guide, it is highly unlikely that she will issue any relief for any third parties who are not part of that case (for example, the issue of whether members of those groups can benefit from the ruling is still in dispute). As a practical matter, this means that the FTC could still enforce its Final Rule against other employers.
This uncertainty may be compounded by two other lawsuits brought by employers challenging the Final Rule. ATS Tree Services, LLC, an arborer in Pennsylvania, has brought a similar challenge in the U.S. District Court for the Eastern District of Pennsylvania. And another employer, Properties of the Villages, Inc., a Florida real estate company, has recently filed a challenge in the U.S. District Court for the Middle District of Florida. Given the U.S. Supreme Court’s recent decisions curtailing the power of federal agencies, it is generally expected that the FTC Final Rule would be set aside if it reaches the Supreme Court. But in the meantime, it is certainly possible that another federal court might see things differently from Judge Brown.
What about the Good Faith Exception? So what options are available to employers who use noncompetes but are unlikely to have the benefit of a nationwide injunction?
The first option is the path of least resistance. If an employer concludes that its noncompetes are no longer worth the bother, the answer is easy: send a notice similar to the one proposed by the FTC to former and current employees telling them it won’t enforce its noncompetes against them. As I wrote previously, the FTC has acknowledged some latitude for the use of narrowly tailored non-solicitation agreements and NDAs, so this may be sufficient for protecting the customer relationships and trade secrets of the employer.
The second option is filing a lawsuit seeking a declaration and injunction similar to what Ryan, LLC and the other parties received from Judge Brown. This means a substantial legal bill but perhaps greater certainty, assuming the presiding judge agrees with Judge Brown’s analysis.
However, there is another option available to an employer who wants to keep its noncompetes but doesn’t want to incur the cost and exposure of litigating against the FTC: It can invoke the “good faith” exception to the Final Rule. Readers will recall that the FTC carved out three exceptions to its noncompete ban, which can now be found within the Federal Register at CFR §910.3:
- (a) a noncompetete accompanying a “bona fide” sale of a business;
- (b) causes of action for noncompetes that accrued prior to the effective date of the Rule; and
- (c) enforcing or attempting to enforce a noncompete where the employer “has a good-faith basis to believe that this part is inapplicable.”
The Federal Register’s text provides support for an argument that relying on a judicial ruling invalidating the Final Rule may qualify as a good faith basis. In the section of the Federal Register outlining the FTC’s rationale for the good faith exception (page 38441 of the Federal Register), the FTC notes that its initial version of the proposed ban created confusion over the circumstances in which an employer could in good faith question any rule banning noncompetes. (In its initial proposed rule released in January 2023, the FTC stated “an employer would have no good faith basis to believe that a worker is subject to an enforceable non-compete ‘where the validity of the rule . . . has been adjudicated and upheld.'”)
Because the FTC recognized this potential confusion, the FTC clarified “that the absence of a judicial ruling on the validity of the final rule does not create a good-faith basis for non-compliance.” Consequently, if a judicial ruling finding the final rule invalid exists (see Judge Brown’s opinion), it stands to reason that an employer now should have a good faith basis for not complying with the Final Rule. Put differently, Judge Brown’s decision enjoining the Final Rule may provide a good faith basis that the Final Rule is invalid and that employers can in good faith continue to enforce their noncompetes.
Of course, this option is not perfect. I am not an administrative law expert, but I expect that the FTC can still try to take action against the employer. For example, I would expect that, at minimum, the FTC could issue a demand that an employer abide by the Final Rule. The employer could then decide whether it wants to litigate the enforceability of its noncompetes or forego its noncompetes altogether.
Given the recent ruling by Judge Brown, and the U.S. Supreme Court’s decisions limiting federal administrative authority (i.e., West Virginia v. EPA and Loper Bright Enterprises v. Raimondo), the smart bet is that the Final Rule’s days are numbered. But in the meantime, employers should expect uncertainty as multiple courts consider the validity of the Final Rule.