A federal court ruled has ruled against the U.S. Federal Trade Commission (FTC) in a widely-watched decision focused on non-compete agreements.
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A federal court has ruled in favor of Ryan, a global tax services and software provider, and against the U.S. Federal Trade Commission (FTC) in a widely watched decision focused on non-compete agreements.
U.S. District Court Judge Ada Brown of the Northern District of Texas issued a stay and a preliminary injunction against the FTC in response to Ryan’s lawsuit, which challenges the new rule. The judge noted, “While this order is preliminary, the Court intends to rule on the ultimate merits of this action on or before August 30, 2024.”
The decision does not apply nationwide—the injunction applies only to the plaintiffs involved in the case.
In her ruling, Judge Brown stated, “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.” She emphasized 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.”
“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,” said John Smith, Ryan’s Chief Legal Officer and General Counsel. “We’re grateful that the U.S. Chamber of Commerce and Texas Association of Business joined our case shortly after we filed it. We appreciate the many organizations—which together represent a vast swath of the American economy—that filed briefs supporting Ryan’s position.”
Smith added, “Ryan will pursue a final decision on the merits that strikes down the FTC’s unlawful ban. In the same spirit, the U.S. Supreme Court in recent days has reasserted constitutional and statutory constraints to reverse overreach by the administrative state. This week, Americans celebrate our nation’s Declaration of Independence from an overreaching royal crown. Non-compete agreements predate the American Revolution, and our lawsuit seeks to preserve a robust freedom of contract for generations of enterprising Americans to come.”
Background
On April 23, 2024, the Federal Trade Commission (FTC) issued a final rule banning non-compete agreements. The final rule made clear “that it is an unfair method of competition—and therefore a violation of section 5—for persons to, among other things, enter into non-compete clauses (“non-competes”) with workers on or after the final rule’s effective date.”
On the same day as the ruling, Ryan, a global tax services and software provider with its principal place of business in Dallas, Texas, issued a legal challenge to the new rule, filing suit in the U.S. District Court for the Northern District of Texas.
It was the first such suit filed to counter what the company described as “the FTC’s lawless action, which imposes an extraordinary burden on businesses seeking to protect their intellectual property (IP) and retain top talent within the professional services industries.” The purpose of the suit, the company says, is “to prevent the immense, undue burdens the FTC’s rule would impose on service-driven companies of every size nationwide.”
The FTC’s final rule was in response to the proposed non-compete clause rule, introduced on January 19, 2023, under sections 5 and 6(g) of the FTC Act.
According to the FTC, the rule followed “careful review and consideration of the entire rulemaking record,” which included over 26,000 public comments (over 25,000 comments supported the ban). Ryan submitted a 54-page public comment against the FTC’s proposed rule, explaining their position that non-compete agreements are an important tool for firms to protect their IP and foster innovation. Without them, Ryan says, firms could hire away a competitor’s employees just to gain insights into their competitor’s intellectual property.
The vote to approve issuing the final rule was not unanimous, with the vote falling 3-2. Commissioners Melissa Holyoak and Andrew N. Ferguson voted no.
Exceptions
The final rule carved out exceptions for senior executives (workers earning more than $151,164 annually in policy-making positions). Those existing non-competes can remain in force—according to the FTC, senior executives represent less than 0.75% of workers. An additional exception applies to non-competes entered into in connection with a sale of a business.
Existing non-competes with non-exempt workers (everybody else) are not enforceable after the effective date, defined as 120 days after publication in the Federal Register. Employers must notify those workers bound by an existing non-compete that they will not be enforcing any non-competes against them. According to Ryan’s lawsuit, the move would retroactively invalidate 30 million employment contracts and preempt the regulatory regimes of at least 46 states.
Other Legal Challenges
Other challenges were filed quickly after the ruling. On April 23, 2024, the same day as Ryan’s court challenge, the U.S. Chamber of Commerce filed a lawsuit against the FTC in Texas. That case was stayed under the first-to-file rule. Under the rule, when two parties file what is essentially the same suit in the federal system but in different jurisdictions, there could be two different outcomes (made even more complicated by Ryan’s involvement in both suits). And while both were filed in different districts in Texas, they would end up in the same place—the Fifth Circuit—following any appeal. The first-to-file rule does what it sounds like and gives the first party priority over matters filed afterward.
Following the ruling, the Chamber joined Ryan’s case. The Business Roundtable, the Texas Association of Business and the Longview Chamber of Commerce also joined the case.
On April 25, 2024, ATS Tree Services, based in Bucks County, Pennsylvania, also filed a lawsuit against the FTC. ATS uses non-compete agreements to protect the investment it makes in its employees’ training, it explains, which gives it some confidence that it is not investing in an employee it will immediately lose to a competitor.
Comments
In response, Tim Bartl, President and CEO of HR Policy Association, which represents chief human resource officers of nearly 400 of the largest employers in the United States, said, in a statement, “HR Policy Association is encouraged by the Court’s decision to partially block the FTC’s rule banning most non-competeagreements. The decision sends a clear message that FTC likely violated the Administrative Procedure Act and exceeded its statutory authority by issuing the ban. In our comments filed with the Commission when the rule was proposed, the Association articulated our firm belief that the Commission lacks the authority to issue such a rule.
We also stated that the rule itself is an excessively broad ban that unjustifiably prohibits the reasonable use of sensibly tailored agreements to protect recognizable business interests. The Association looks forward to a full judicial resolution of this matter and is fully prepared to work with all stakeholders on a reasonable approach to non-compete agreements that targets any misuse while preserving their continued reasonable use to protect legitimate investments.”
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