A federal judge has issued a stay and preliminary injunction that will block enforcement of the Federal Trade Commission’s final rule on noncompete agreements for some employers.
Specifically, plaintiff-intervenors in a lawsuit against the FTC — Ryan LLC, the US Chamber of Commerce, the Business Roundtable, the Texas Association of Business and the Longview Chamber of Commerce — as employers, will not be held to the rule as of Sept. 4, when it is set to go into effect.
As of now, for association members and all other employers, the rule is set to take effect on Sept. 4, although Judge Ada Brown of US District Court for the Northern District of Texas said she plans to make a final ruling in the case by Aug. 30, which may change the rule’s applicability to other employers.
The lawsuit came within hours of the FTC’s vote approving the rule in April. According to court records, tax services and software provider Ryan filed a lawsuit April 23 noting that the company “occasionally enters into non-compete agreements with employees who have access to particularly sensitive business information.”
The rule prohibits employers across the country from using the clauses in most instances. Existing noncompetes for most workers no longer would be enforceable. Existing agreements with senior executives — defined as employees in policy-making positions and earning more than $151,164 annually — could remain in force, but employers would be banned from entering into or attempting to enforce any new noncompetes, even if they involve senior executives.
“The court’s decision is an important step toward invalidating a rule that burdens not only Ryan, but also Ryan’s clients, and multitudes of employers and employees across America,” John Smith, Ryan chief legal officer and general counsel, said in a statement.
The judge’s preliminary injunction for the plaintiff-intervenors was “widely anticipated,” Polsinelli attorneys wrote in an article for the National Law Review. They added, however, that it was “less anticipated” that the preliminary injunction would not apply to all employers.
Attorneys at Holland & Knight called the injunction a “significant initial win for businesses challenging the rule.”
In response to Brown’s injunction, FTC spokesperson Douglas Farrar told several media outlets that “the FTC stands by our clear authority, supported by statute and precedent, to issue this rule. We will keep fighting to free hardworking Americans from unlawful noncompetes, which reduce innovation, inhibit economic growth, trap workers, and undermine Americans’ economic liberty.”
The noncompete rule faces other legal challenges as well. For instance, in a case filed April 25 in Pennsylvania, ATS Tree Services, which employs only 12 people, is seeking an injunction, alleging that the FTC “cast off its statutory and constitutional restraints and unilaterally declared noncompete agreements nationally to be unfair and therefore banned.” Oral arguments on that injunction motion are scheduled for Wednesday, according to law firm Crowell & Moring.
As legal challenges continue to play out, attorneys at Littler encourage employers to stay abreast of developments while also planning with legal counsel what the appropriate strategy will be for their particular organizations come Sept. 4.
Brown’s July 3 ruling came days after the US Supreme Court ruled 6-3 in Loper Bright Enterprises v. Raimondo to overturn the Chevron doctrine, which held that US courts should give substantial deference to federal agency decisions. In a subsequent ruling, a Supreme Court ruling in Corner Post, Inc. v. Board of Governors opened the door to broad challenges to federal regulations long after they take effect.
Brown’s final determination remains to be seen, but words she used in issuing the preliminary injunction in the Ryan case do not bode well for the FTC’s noncompete rule. She said that “the Court concludes the Commission has exceeded its statutory authority in promulgating the Non-Compete Rule, and thus Plaintiffs are likely to succeed on the merits” and that “the role of an administrative agency is to do as told by Congress, not to do what the agency think[s] it should do.”
