Dentons Digest
In Ryan, LLC v. Federal Trade Commission, Case No. 3:24-CV-000986 (N.D. Tex. April 23, 2024), Ryan, LLC initiated a lawsuit challenging the newly adopted “Non-Compete Clause Rule” by the Federal Trade Commission (the “FTC”). If enacted, the Rule would prohibit certain contractual “non-compete” arrangements with employees. In the lawsuit, Ryan, the Chamber of Commerce, and other business groups moved to enjoin the Non-Compete Clause Rule from taking effect on September 4, 2024. At present, it appears that the court intends to issuing a decision on that motion by July 3, 2024. If granted, the injunction is likely to stay the enactment of the Non-Compete Clause Rule pending a full review by the court. Thus, it is highly recommended that employers continue to monitor this case and the anticipated Court’s ruling.
Background on the FTC’s Non-Compete Clause Rule
On April 23, 2024, the FTC, by a 3-2 vote, adopted a near-total ban on non-competes ancillary to an employment relationship. Under the FTC’s Non-Compete Clause Rule, employers subject to the purview of the FTC, would be prohibited from entering into, attempting to enter into, and enforcing any non-competes with employees and independent contractors. 16 C.F.R. § 910.2(a). Non-competes for “senior executives” may remain in force, but employers are prohibited from entering into or attempting to enforce any new non-competes with senior executives. 16 C.F.R. § 910.1. Under the rule, “senior executives” include CEOs, presidents, and other senior corporate officers “who control significant aspects of a business entity or common enterprise.” 16 C.F.R. §§ 910.1, 910.2(a)(2)(ii). In addition, under the Rule, employers will be required to provide notice to current and former employees, other than senior executives, who are bound by an existing non-compete and inform them that they will not enforce any non-competes against them. 16 C.F.R. § 910.2(b).
The Non-Compete Clause does not apply to non-competes ancillary to business ownership, including owners who have sold any portion of their businesses. 16 C.F.R. § 910.3(a). The Rule also does not apply to certain industries not governed by the FTC, including banks, savings and loan institutions, federal credit unions, commons carriers, and air and foreign air carriers. 15 U.S.C. 45(a)(2).
Significantly, The Non-Compete Clause Rule does not categorically prohibit other employment-related restrictive covenants, such as non-disclosure agreements or non-solicitation agreements. However, any non-solicitation covenant that is so broad that it has the same functional effect as a term or condition prohibiting or penalizing an employee from seeking or accepting other work or starting a business after the cessation of an employment relationship may be considered a “non-compete clause” under the Rule and declared unenforceable.
The Non-Compete Clause Rule is not intended to interfere with or displace state laws that are more restrictive than the Non-Compete Clause Rule, like California. 16 C.F.R. § 910.4.
Ryan’s Motion for Injunction
Shortly after filing its lawsuit, Ryan,the Chamber of Commerce, and other business groups filed a motion to stay the effective date for the Non-Compete Rule and a preliminary injunction. The Motion for Injunction raises three main arguments: (1) the Non-Compete Clause Rule exceeds the FTC’s authority under the Non-Delegation Doctrine assumed in the Federal Trade Commission Act (the “Act”); (2) the Non-Compete Clause Rule violates the Major Questions Doctrine; and (3) the FTC’s structure is unconstitutional. Among other things, the businesses assert that if Congress aimed to delegate the authority with which the FTC may unilaterally, and substantively, alter 30 Million employment contracts, then Congress would have made it more obvious. Ryan also Ryan argues that under the Major Questions Doctrine, agencies, like the FTC, cannot regulate far-reaching and heavily impactful economic activities without clear authority from Congress. Ryan contends that allowing the Non-Compete Clause Rule to take effect would turn the Act, into an employee-protection act, exceeding its Congressional purpose.
In response, the FTC contends that it has statutory authority to promulgate the Non-Compete Clause Rule because “Congress authorized the Commission in clear language in the Act to prevent unfair methods of competition through both adjudication and rulemaking, and the FTC’s choice of rulemaking to address the aggregate anti-competitive effects of non-competes is consistent with the statutory scheme.” In addition, the FTC asserts that it properly determined that non-competes are unfair methods of competition because it assessed the aggregate effects of non-competes and determined that “non-competes are unjustified because employers have other means to protect their legitimate interests without the same burdens on competition.”
On June 13, 2024, the Court denied the parties’ requests for oral arguments on the Motion for Injunction. The Court intends to issue a ruling by July 3, 2024.
Another Legal Challenge
In addition to Ryan case, there is currently another pending legal challenge to the FTC’s Non-Compete Clause Rule in ATS Tree Services, LLC v. FTC, No. 2:24-CV-01743 (E.D. Pa.) (Hodge, J.). The parties in ATS recently briefed the company’s request to stay the effective date of the Non-Compete Rule with ATS raising similar arguments to Ryan. At this point, there is no indication from the Court of a pending ruling and, therefore, it is unclear whether the district court will rule on the parties’ motion, or wait for a ruling in Ryan v. FTC.
Implication for Employers
Before revising any employment contracts and/or removing any non-compete clauses, companies should pay close attention to the upcoming decisions in the Ryan and ATS Tree Services matters over the next few months. Even one decision in favor of the businesses may result in a temporary and/or long-term stay of the FTC Non-Compete Clause Rule taking effect.
