A few months ago, the Federal Trade Commission (FTC) finalized a regulation that banned virtually all non-compete agreements in the United States. It seemed as though a new era had dawned for employers and employees alike. Today, the fate of that rule hangs in the balance as federal courts in Texas and Pennsylvania grapple with whether the FTC had the power to make this rule.
For now, the rule is scheduled to become effective on September 4, 2024.
But what happens if the a court in a particular location, like Texas, decides that the new rule is invalid? Does it still take effect for the rest of the nation?
A Bit of Background
You may recall a blog post from earlier this year discussing the final rule from the FTC declaring non-compete clauses to be an unfair method of competition and banning non-compete agreements nationwide for any employee who’s not a senior executive.
A non-compete is an agreement that prevents an employee from competing with their employer for a certain period of time and within a certain geographic area. Some non-compete agreements may even have a provision prohibiting a former employee from starting and operating their own business. The FTC created this rule due to its increasing concerns about non-compete agreements, including that they allegedly:
- Prevent competition in labor markets;
- Suppress earnings for workers across the labor force; and
- Can derail a person’s career and hurt their finances.
The draft rule originally had been open for comment until April 2023, during which time the FTC received over 26,000 comments from businesses, public advocacy groups, and private citizens. After taking the comments into consideration, the FTC published the final rule on May 7, 2024.
Immediately thereafter, lawsuits were filed to stop this rule from taking effect.
Lawsuits, Lawsuits, and More Lawsuits
The first lawsuit was filed by the United States Chamber of Commerce in the District Court for the Northern District of Texas. This was followed by another lawsuit in the same court by a tax service firm known as Ryan, LLC. Eventually, the first lawsuit was stayed in order for the Chamber of Commerce to intervene in the second lawsuit. The Chamber and Ryan joined forces.
In its complaint, Ryan claimed that the FTC simply doesn’t have to power to make the rule because Congress did not give the FTC authority to make substantive rules, meaning rules that have the same legal force as a law passed by Congress. Thus, Ryan demands universal vacatur, which means the rule would be set aside and invalidated across the country. Essentially, it would be bulldozed.
On July 3, 2024, the Texas court granted a preliminary injunction in favor of the plaintiffs, meaning that the rule can’t apply to those parties when or if it takes effect on September 4, 2024. In granting the injunction, the court found that there’s a substantial likelihood that Ryan and the Chamber will succeed on the merits of their case. While this finding doesn’t mean that the rule is definitely going to be bulldozed, it’s a signal about to how the court eventually may rule.
Not so fast, though.
While a preliminary injunction was granted to the plaintiffs in Texas, one was denied in a similar case in a Pennsylvania federal court. In this case, a local tree service brought a lawsuit against the FTC with essentially the same claims as Ryan. When it denied an injunction to the tree service plaintiff, the Pennsylvania court contended that there wasn’t a reasonable likelihood that the tree service would succeed in their case.
Consequently, there’s a fair bit of disagreement between these two federal courts on whether the rule is valid. A ruling may be coming soon out of Texas, because the court there is scheduled to decide the merits of the case on or before August 30, 2024, less than a week before the rule is due to take effect.
Where the FTC’s Non-Compete Rule Stands Today
Of course, all of this information begs the question: can the Texas court simply bulldoze a final rule for the entire nation?
Short answer: most likely, yes.
The Fifth Circuit, where the Texas federal court is located, has stated explicitly in earlier cases that if one federal court vacates a rule, that rule is vacated for the entire nation. In fact, even the Third Circuit, where the Pennsylvania court is located, recognizes universal vacatur as a legitimate remedy where a rule is unlawful, arbitrary, or capricious.
Closer to home, the District Court for the Southern District of New York – based in Manhattan – has reasoned that universal vacatur should apply where a federal rule has a universal effect. That reasoning might, in fact, apply here, because the FTC’s non-compete rule is intended to effect every business in the nation, so the remedy of vacatur should, and likely would, apply nationally.
Again, however, not so fast.
We know the U.S. Supreme Court is less than enthusiastic about the concept of universal vacatur. Justice Gorsuch commented about universal vacatur in a different case and expressed doubts about whether it’s a permissible remedy. At the same time, though, Justice Gorsuch recognized that the issue wasn’t yet before the Supreme Court and thus the issue remains undecided at the highest court in the land.
Seriously, Though, Where Do We Stand on the Non-Compete Rule?
As of August 1, 2024, it seems that the non-compete rule’s immediate fate lies in the hands of the District Court for the Northern District of Texas. If the court decides to vacate the rule on or before August 30, then it seems that the non-compete clause rule won’t go live in September.
Whichever way the court decides, though, there’s bound to be an appeal.
Yet if the court vacates the non-compete rule, it wouldn’t be effective during the course of any appeal. And if there’s an appeal, it’s quite possible that – eventually – the issue will end up before the Supreme Court of the United States. And, there, it’s anyone’s guess. So stay tuned. We’ll be watching closely.
Employment and Contract Questions?
If you’ve got questions about non-competes, whether in an employment or independent contractor situation, feel free to call us.
We’re always ready to help.
