Client Insight: Legal Challenge to FTC Noncompetition Ban is Successful, but Limited to Named Parties Only. Now What?
As we reported on July 3, 2024, a federal judge has halted the FTC’s ban on post-termination noncompetition agreements, but only as it pertains to the named parties in the case. In Ryan LLC v. FTC, the court preliminarily held that the ban may not take effect because: (1) the FTC lacks the statutory authority to issue a nationwide ban on noncompetition agreements; and (2) the ban is arbitrary and capricious because the FTC failed to present sufficient evidence or reasonable explanation to support such a sweeping rule. For now, however, this ruling applies only to Ryan LLC, the U.S. Chamber of Commerce, and other named plaintiffs in the case, not to all employers. The Ryan court will issue a final ruling on the merits of the case on August 30, 2024. Although the court appears poised to permanently block the ban, there is still a chance it will take effect on September 4, 2024.
The FTC ban is also being challenged in federal court in Pennsylvania. The court in ATS Tree Services v. FTC heard oral argument on July 10, 2024, and plans to rule on a similar motion to stay by July 23, 2024. Whether that court rules in favor of the FTC, or issues a similar or broader injunction than the Ryan court, remains to be seen.
Key Takeaways for Employers
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- Employers do not need to take any immediate action at this time.
- The FTC suffered a loss in Ryan LLC v. FTC but the case is far from over.
- The injunction in Ryan does not currently impact employers other than the named plaintiffs, but additional court decisions are expected before the September 4 effective date that could result in relief for all employers.
- Employers should continue monitoring legal developments in Ryan LLC v. FTC and ATS Tree Services v. FTC. The key dates, for now, are July 23, 2024 in ATS, and August 30, 2024 in Ryan.
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Employers should begin reviewing the post-termination noncompetition agreements signed by their current and former workers in case they need to provide notices to those workers by the effective date.
The FTC’s Ban
On April 23, 2024, the FTC announced a nationwide ban on nearly all post-termination noncompetition agreements. The ban would apply to all former and current employees, except for a few of the most senior executives in a company. The ban also requires employers to send notices to all current and former employees who signed a post-termination noncompetition agreement, advising them that those provisions cannot, and will not, be enforced. For a detailed discussion of the ban’s requirements and impact, please see Gunderson’s:
Within 48 hours of the FTC announcing the ban, employers filed federal lawsuits in Texas and Pennsylvania, asking the courts to prevent the ban from ever taking effect. Those lawsuits include Ryan LLC v. FTC (N.D. Texas) and ATS Tree Services v. FTC (E.D. Pennsylvania).
What Just Happened in Ryan LLC v. FTC?
The court in Ryan LLC v. FTC clearly ruled against the FTC. As noted above, the court preliminarily found that the FTC exceeded its statutory authority in promulgating the noncompetition ban, because Section 6(g) of the FTC Act does not grant the FTC substantive rulemaking power for unfair methods of competition. The court also indicated a substantial likelihood that the new rule is arbitrary and capricious due to its broad application without a reasonable explanation. The plaintiffs and plaintiff-interveners in that case presented additional grounds for striking down the FTC’s ban but the court did not address those arguments before issuing a preliminary injunction and halting the ban, as it pertains to the named parties in the case. The court limited the injunction to the named parties only, claiming the court had not yet seen evidence of nationwide harm to all employers.
On July 10, 2024, the U.S. Chamber of Commerce (one of the named parties in the Ryan case) filed an expedited motion for reconsideration, asking the court to expand its ruling to cover all employers in the U.S., or at least all members of the Chamber. On July 11, 2024, the court denied the motion, stating that the plaintiffs have not shown they are entitled to the requested modifications.
By August 30, 2024, the Ryan court will issue a decision on the merits of the case. In the meantime, the court will receive additional briefings from the parties over the next several weeks. Whether the court strikes down the ban in its entirety, permits the ban to take effect, or reaches some other conclusion, we expect the losing party to immediately appeal to the U.S. Court of Appeals for the Fifth Circuit. As it happens, the Fifth Circuit is generally considered to be “pro employer.”
What’s Happening in ATS Tree Services?
The plaintiff in ATS Tree Services v. FTC filed a nearly identical challenge to the FTC’s ban in federal court in Pennsylvania. The court in ATS Tree Services is planning to issue its ruling on the parties’ motion for a preliminary injunction by July 23, 2024. If the court blocks the ban from taking effect nationwide or permits the rule to take effect nationwide, we expect the losing party will immediately file an appeal with the U.S. Court of Appeals for the Third Circuit. The Third Circuit is generally considered less “pro employer” than the Fifth Circuit, and may be more likely to rule in favor of the FTC. Whether the ruling in ATS Tree Services will impact or influence the proceedings in Ryan LLC v. FTC remains to be seen.
Possible Outcomes in Broad Brushstrokes
If either the ATS Tree Services court or the Ryan court issues a nationwide injunction, then the ban is blocked, the status quo remains in effect, and clients must continue to comply with various state and local laws covering noncompetition agreements. The FTC will appeal but the September 4, 2024 effective date will likely be pushed back indefinitely.
If neither court issues a nationwide injunction, appeals will follow, but the ban may take effect on September 4, 2024. If that occurs, employers will need to look to other available tools for protecting their business interests, including:
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- Robust nondisclosure agreements and proprietary information and invention agreements
- Carefully crafted non-solicitation agreements
- Enhanced data security measures and access controls
- Employee training on confidentiality
- Trade secret protection strategies
- Garden leave provisions
- Deferred compensation plans tied to loyalty
- Improved exit procedures for departing employees
- Providing key executives with sufficient salary and decision-making authority to qualify for the "Senior Executive" exception to the FTC ban.
Gunderson attorneys are always available to discuss and assist with implementing these, or other, strategies.
Immediate Next Steps for Employers
Employers do not need to take any immediate action at this time. Nonetheless, employers may wish to:
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- Reviewpost-termination noncompetition agreements signed by their current and former workers
- Understand employers’ notice obligations if the ban takes effect
- Stay informed
Some commentators have suggested that businesses join the U.S. Chamber of Commerce to potentially benefit from the injunction in the Ryan case. However, this strategy may only be effective if the court expands its injunction to cover Chamber members when it issues its final ruling on August 30, 2024. The actual benefits of this approach remain uncertain until then. Companies interested in Chamber membership can find more information on the Chamber's website here.
Gunderson will continue to monitor and report on all developments regarding the FTC's ban on post-termination noncompetition agreements. If you have any questions regarding the ban or the legal proceedings discussed above, please contact your Gunderson attorney.