On April 23, 2024, the U.S. Federal Trade Commission (FTC) issued its final rule (the Final Rule) invalidating virtually all new and existing non-compete clauses (non-competes) that prohibit a service provider from working or operating a business in the U.S. during any post-employment period, with limited exceptions. The Final Rule also requires companies to provide written notice to all current and former service providers subject to unenforceable non-competes that such clause is now illegal and unenforceable. Additional details of the Final Rule can be found in our previous bulletin.
In this article, we turn to the recent challenges to the non-compete ban and provide practical tips for companies to prepare ahead of the Final Rule’s effective date.
As of this writing, there are three noteworthy pending lawsuits challenging the Final Rule.
Ryan, LLC, a tax services firm, filed a complaint against the FTC on April 23, 2024, in the U.S. District Court for the Northern District of Texas1. The next day, the U.S. Chamber of Commerce, Business Roundtable, Texas Association of Business and Longview Chamber of Commerce filed a nearly identical challenge in the Eastern District of Texas2. In Ryan, the plaintiff sought to vacate and set aside the Final Rule, declare that the authorizing section of the Federal Trade Commission Act violates the U.S. Constitution’s nondelegation doctrine and declare that the FTC is unconstitutionally structured. The U.S. Chamber of Commerce and its co-plaintiffs intervened as plaintiffs in the Ryan action on May 8, 2024, and their original action was dismissed without prejudice.
All Ryan plaintiffs moved to stay enforcement of the Final Rule and for a preliminary injunction. On July 3, the Court stayed the effective date of, and enjoined, the Final Rule, but only as to the plaintiffs. In doing so, the Court held that (1) the plaintiffs are substantially likely to prevail on the merits of their claim, (2) the plaintiffs will suffer irreparable harm absent an injunction, (3) the balance of harms favours the plaintiffs and (4) the public interest favours the plaintiffs. The preliminary injunction will remain in place until the Court issues a final merits adjudication on or before August 30.
Given the Court’s reasoning, coupled with the U.S. Supreme Court’s recent decision in Loper Bright Enterprises v. Raimondo3, we think it is more likely than not that the Court will award plaintiffs the ultimate relief they seek.
The second recent challenge to the FTC’s non-compete ban is ATS Tree Services v. FTC4. In this case, the plaintiff filed suit in the Eastern District of Pennsylvania on April 25, 2024, seeking (1) a preliminary and permanent injunction against the enforcement of the Final Rule and (2) an order declaring it unlawful and set aside. The ATS preliminary injunction motion was heard by the Court on July 10, 2024, and we expect a ruling to be issued by July 23, 2024. On July 23, 2024, the court denied ATS’s motion to stay and preliminarily enjoin enforcement of the Final Rule, on all grounds noting the lack of irreparable harm to ATS and upholding the Final Rule on the merits.
The third challenge to the Final Rule, Properties of the Villages, Inc. v. FTC5 was filed on June 21, 2024, in the Middle District of Florida. There, plaintiff, real estate broker of an adult community, sought, among other relief, to invalidate and set aside the Final Rule or hold it unlawful as applied to plaintiff. Plaintiff also sought a stay and preliminary injunction of the Final Rule pending a final merits determination. The briefing on that motion is ongoing but we expect a decision before the Final Rule effective date.
For a summary of these legal challenges, with additional practical tips for companies, watch the video below.
Unless either litigation challenge prevails and the Final Rule’s implementation is delayed or permanently enjoined nationwide (instead of only as to the plaintiffs), the Final Rule will become effective on September 4, 2024 (the Effective Date). Although the Final Rule will affect each company differently, companies should consider taking the following steps to prepare ahead of the Final Rule coming into force.
To discuss these issues, please contact the author(s).
This publication is a general discussion of certain legal and related developments and should not be relied upon as legal advice. If you require legal advice, we would be pleased to discuss the issues in this publication with you, in the context of your particular circumstances.
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