Two Weeks Out and the Status of the FTC’s Non-Compete Ban Remains Up in the Air

As the Federal Trade Commission’s (FTC) ban on non-compete agreements is set to take effect September 4, 2024, its status remains in flux. Two federal district courts have issued rulings enjoining the FTC from enforcing the ban. Both rulings are limited to only the named plaintiff in the case, but one of these courts has promised a decision on whether to enter a nationwide injunction before August 30, 2024. (A third court declined to invalidate the ban or enjoin its enforcement.) This puts employers in a difficult situation. Employers may choose to move forward as if the ban will take effect and (1) cease entering new non-compete agreements on September 4, 2024, and (2) send a notice to current employees (and former employees still under an active restricted period) that existing non-compete agreements are no longer enforceable. Alternatively, employers can take a wait-and-see approach as to whether a federal court will issue a nationwide injunction on the ban within the next two weeks or in the coming months, saving the time and expense of immediate compliance.

To recap the current status of the legal challenges, in Ryan, LLC v. Federal Trade Commission, the Northern District of Texas granted the plaintiff’s motion for a stay and preliminary injunction against the FTC’s non-compete ban. In sum, the court determined that the ban likely exceeded the scope of the FTC’s statutory authority by issuing a substantive rule relating to methods of unfair competition, which the FTC does not have authority to do. Nevertheless, despite concluding that the non-compete ban likely exceeded the FTC’s statutory authority and holding that an injunction was appropriate, the court expressly declined to enter a nationwide injunction of the ban, finding that it would be inappropriate at that time to issue relief beyond the parties in the case. The court noted that it would issue a “merits disposition” of the proceeding prior to August 30, 2024, which is notable as being before the ban takes effect. Since then, the parties have extensively briefed the request for a nationwide injunction, with the plaintiff taking the position that such a nationwide injunction is not only appropriate but required. Thus, it is fully expected the court will decide one way or another whether to issue such an injunction when it issues its “merits disposition” before August 30, 2024.

On July 23, 2024, the Eastern District of Pennsylvania reached the opposite conclusion in ATS Tree Services, LLC v. Federal Trade Commission. There, the court reasoned that the FTC did have authority to issue substantive rules related to acts of unfair competition. It was also persuaded that the employer had failed to establish irreparable harm — a required showing for a preliminary injunction. Accordingly, the court declined to issue a preliminary injunction on the non-compete ban.

Most recently, on August 15, 2024, in Properties of the Villages, Inc. v. Federal Trade Commission, the Middle District of Florida went the way of the Northern District of Texas and granted a preliminary injunction against the FTC, but for a different reason than the court in Ryan. It held that the new non-compete ban violates the “major questions doctrine,” which limits the ability of an agency to issue substantive rules on major questions that are better reserved for the elected branches of government. Like in Ryan, the court enjoined the FTC from enforcing the non-compete ban against the named plaintiff but expressly stated that it was not issuing an injunction nationwide. No timeline was given as to when or whether the court would consider granting a nationwide injunction.

Thus, we will continue to monitor the Northern District of Texas, where the issue of whether to grant a nationwide injunction remains pending and where an order on the question of a nationwide injunction is expected to be issued on or before August 30, 2024. Given the reasoning for the Ryan Court’s ruling is broadly applicable to the entire rule, the court certainly could enter a nationwide injunction. But it is difficult to predict, especially given that the court expressly rejected a nationwide injunction at the preliminary injunction stage.

So, what options do employers have now? If the Northern District of Texas issues a nationwide injunction, employers may choose to reasonably rely upon that nationwide injunction to maintain the status quo with respect to the use of non-compete agreements as expected appeals work though the system, as long as the status quo complies with applicable state law. This wait and see approach may provide employers the opportunity to keep their existing non-compete agreements in place until we have more certainty on whether the FTC rule will survive legal challenge in the future.

In the event the Northern District of Texas does not issue a nationwide injunction and the rule goes into effect September 4, then employers should have a legal strategy for how they plan to address the FTC’s rule with respect to existing non-compete agreements and into the future. Absent a nationwide injunction, some employers may choose to fully comply with the FTC rule and identify current and former employees still under an active non-compete restricted period and then send the notice required by the FTC rule by September 4, and eliminate non-compete provisions from their agreements. If an employer were to choose this route, then taking steps now to identify the list of impacted employees should make compliance by September 4 a little easier. Other employers may still take a wait-and-see approach, to see how the FTC rule withstands judicial scrutiny over the next several months knowing that the FTC rule does not provide employees with a private cause of action for failure to provide timely notice.

Whatever route an employer is considering at this point, we recommend speaking with your trusted employment counsel to evaluate the options and risks to develop a strategy that works for your business.