Federal Trade Commission Noncompete Clause Rule Litigation Update

The Federal Trade Commission on April 23 approved a Final Rule banning almost all worker noncompete clauses (noncompete rule). Absent a court entering a nationwide injunction or vacating the rule, it is set to go into effect on September 4. Several plaintiffs have brought complaints in federal court challenging the noncompete rule's validity. Two federal district courts have issued conflicting preliminary rulings and anticipate issuing final decisions before the noncompete rule’s effective date. A third lawsuit is under way, but it is unclear if the court will reach a decision before September 4.

Below are summaries of the court cases:

TEXAS

Ryan v. FTC

On July 3, 2024, the US District Court for the Northern District of Texas granted the plaintiffs’ preliminary injunction motions (see our July 8, 2024 LawFlash), halting the noncompete rule for the plaintiffs in this case. The court found that the Federal Trade Commission (FTC) likely exceeded its statutory authority and acted arbitrarily and capriciously. This injunction is limited to the plaintiffs in the Ryan case and stays the noncompete rule’s effective date only for them.

On July 10, the plaintiff and plaintiff-intervenors (including the US Chamber of Commerce) filed a motion for limited reconsideration asking the court to expand the scope of relief in its preliminary injunction. The court denied that motion on July 11, concluding that the plaintiff and plaintiff-intervenors had not shown themselves entitled to the respective relief requested. The court previously indicated it will enter its merits disposition on the parties’ motions for summary judgment by August 30, 2024, prior to the noncompete rule’s effective date of September 4, 2024.

PENNSYLVANIA

ATS Tree Services LLC v. FTC

On July 23, 2024, the US District Court for the Eastern District of Pennsylvania denied the plaintiff’s motion for a preliminary injunction. The court ruled that the FTC acted within its authority under the FTC Act to promulgate substantive unfair methods of competition rules. As a result, according to the Pennsylvania court, the FTC has the authority to enforce the noncompete rule.

FLORIDA

Properties of the Villages Inc. v. FTC

On July 2, 2024, the plaintiff filed a motion for preliminary injunction in the US District Court for the Middle District of Florida, requesting a stay of the noncompete rule’s effective date. The FTC filed its opposition on July 25, 2024. The court allowed several financial services trade associations and other amici curiae to file amicus briefs. The court set a hearing on the plaintiff’s motion on August 14. 

POTENTIAL OUTCOMES

All three cases are still pending final adjudications. Several scenarios could unfold:

• The Texas district court could enter a nationwide injunction or vacate the noncompete rule. The court in the Ryan case could grant the plaintiffs' motions for summary judgment and enter a national injunction or vacate the noncompete rule entirely. Such a ruling would apply universally, not just to the litigating parties.
• The Texas district court could refuse to enter a nationwide injunction or order vacating the rule. The court in Ryan could follow its preliminary injunction reasoning and limit its ruling to the Ryan plaintiffs, meaning that the noncompete rule would still go into effect on September 4 for all others.
• The Texas district court could reverse its stance. Although unlikely, if the court denies the Ryan plaintiffs’ motions for summary judgment and grants the FTC’s motion, the preliminary injunction will dissolve, and the noncompete rule will go into effect for all entities, including the Ryan plaintiffs.
• The courts could issue inconsistent rulings. If the courts in Ryan and ATS Tree Services maintain their preliminary rulings, there would be conflicting orders—one upholding the noncompete rule as within the FTC’s authority and another holding that the noncompete rule is invalid but failing to issue a nationwide remedy. The appellate courts and potentially the US Supreme Court would likely need to resolve the inconsistency. The timeline for the appeal process is uncertain and could take years.

NEXT STEPS

Litigation over the noncompete rule is active and ongoing, with potential for significant changes before and after the rule’s effective date of September 4, 2024. In the meantime, employers should prepare for various outcomes, including by:

• Taking inventory of any agreements with noncompete clauses
• Reviewing other provisions that may have the same effect as a noncompete, including nonsolicitation, no-accept, and no-service provisions
• Considering alternative protective measures, such as implementing additional procedures to protect confidential, proprietary, and trade secret information, including by tailoring nondisclosure agreements to address recent case law challenging the enforceability of overly broad confidentiality provisions
• Considering whether, when, and how to issue notices to workers with existing noncompetes stating that they are no longer enforceable if the noncompete rule goes into effect on September 4, 2024 without a nationwide remedy having been issued. The FTC, in its stated effort to facilitate compliance and minimize the burden on employers, includes model language in the Final Rule that satisfies this notice requirement, although employers can consider alternative notices. (See 16 C.F.R. § 910.2(b)(4).)