It’s Goin’ Down, I’m Yellin’ Timber

Texas Court Enjoins Enactment of FTC Final Rule

The ruling only applies to the Plaintiffs in Ryan LLC vs Federal Trade Commission…for now. With the promise of a wider ruling by August 30, 2024, just days before the September 4, 2024 enactment date, will the FTC Final Rule on Non-Competes actually go into effect?

AUGUST 2024 UPDATE: As anticipated, on August 20, 2024, a federal judge in the northern district of Texas granted summary judgement in favor of the plaintiffs in Ryan LLC v. Federal Trade Commission, ordering the FTC Final Rule be set aside with nationwide effect, “and the [FTC Final] Rule shall not be enforced or otherwise take effect on September 4, 2024, or thereafter.” The final judgement is eligible for appeal.

Does the Texas ruling give us an indication of what will come to be in a post Chevron world?

The first case challenging the FTC final rule on non-competes, Ryan LLC vs Federal Trade Commission, is working its way through the Texas federal courts, and there are more cases in queue around the country. The plaintiffs in Ryan LLC v FTC previously filed a Motion for Stay of Effective Date and Preliminary Injunction, which Judge Brown ruled on earlier this month, via a 33-page Memorandum Opinion and Order.

A preliminary injunction is an “extraordinary equitable remedy” only available when there is a “substantial” likelihood of success on the merits. Here, the judge determined that there is a substantial likelihood that the plaintiffs will succeed on the merits and the judge granted the motion. While the ultimate decision on the merits is not “certain,” the judge indicated that the FTC exceeded its statutory authority in issuing the final rule, and the FTC Act does not authorize the FTC to issue substantive rulemaking regarding unfair methods of competition, but instead limits FTC rulemaking in such scenarios to “housekeeping” rules.

In issuing the ruling, the judge highlighted that “[A] court must look to the intent of the legislature and must construe the statute so as to give effect to that intent,” specifically citing the recent Supreme Court decision in Loper Bright Enterprises v. Raimondo, which found that, “The deference that Chevron requires of courts reviewing agency action cannot be squared with the [Administrative Procedure Act].”

Would the plaintiffs’ motion in Ryan LLC have succeeded without the recent decision in Loper Bright? The answer is somewhere between maybe and yes. Judge Brown also indicated that the plaintiffs are likely to succeed on the merits of their argument that the FTC final rule is arbitrary and capricious, in part due to the sweeping prohibition with few exceptions instead of acting to target specific, harmful non-competes. The text of Judge Brown’s 33 page Memorandum Opinion provides what is likely a preview of the decision on the merits that is expected on or before August 30, 2024.

The judge did limit the ruling to the original plaintiff and intervening plaintiffs, in part due to the lack of briefing provided to support a broader ruling. We will have to wait to read Judge Brown’s final ruling on the merits as well as the results of the almost certain appeals that will follow these anticipated lower court decisions.

In the meantime, unless a company was one of the few plaintiffs named in Ryan LLC v FTC, the September 4, 2024 deadline on the enactment of the FTC final rule continues to approach. We will have more guidance from the courts before the enactment date, as Judge Brown rules on the merits prior to August 30, 2024 and another ruling on a preliminary injunction filed in the Eastern District of Pennsylvania is expected by July 23, 2024.

It is valuable for all employers to review existing nondisclosure agreements and noncompete agreements to analyze for compliance with all applicable state and federal laws as well as evaluate the enforceability under the FTC final rule. Regardless of the ultimate fate of the FTC final rule on non-competes, the increased prevalence of restrictive covenants and non-competes has resulting in a number of states addressing, including Virginia, which passed Va Code Ann §40.1-28.7:8 to address specific concerns regarding the use of covenants not to compete for “low-wage” employees.

It is safe to predict that new rules issued by agencies will see increased scrutiny and challenges as potential plaintiffs, who may have been reluctant in the past to pursue claims with Chevron deference, conduct their cost vs. benefit analysis. A multitude of existing rules are also likely getting a fresh eye from potential plaintiffs and industry organizations in the wake of the Supreme Court decision in Corner Post, Inc. v Board of Governors of the Federal Reserve System, which held that an APA claim does not accrue for purposes of 28 U.S.C. §2401(a)’s 6-year statute of limitations until the plaintiff is injured by final agency action. The Corner Post decision was a departure from the historic position taken by most federal circuits that a plaintiff’s claim under the APA first accrues (and the statute of limitations begins to run) when an agency publishes a rule.

Justice Jackson in her Corner Post dissent predicted a “tsunami” of litigation, “…this much is clear: The tsunami of lawsuits against agencies that the Court’s holdings in this case [Corner Post] and Loper Bright have authorized has the potential to devastate the functioning of the Federal Government.” While Justice Jackson’s prediction remains to be seen, it is clear that rules involving education, employment, healthcare, the environment, energy, the financial sector, and everything in between may well be reshaped by courts over the coming months and years.