Federal Courts Differ on the “Likelihood of Success” of Challenges to the FTC’s Authority to Promulgate the Non-Compete Clause Rule

Earlier this month we outlined the current legal challenges to the Federal Trade Commission’s (FTC) recently issued Non-Compete Clause Rule (the “Final Rule”) set to go into effect on September 4, 2024. There, we noted a Texas Federal Court issued an order preventing the FTC from implementing and enforcing the Final Rule as to the named parties in that suit (the “Ryan Litigation”).[1] Below is an update on the Ryan Litigation and a summary of a Pennsylvania Federal Court’s order denying injunction relief to the plaintiff in that matter (the “ATS Litigation”).[2] These courts differ in opinion on the likelihood of success their respective plaintiffs have in challenging the FTC’s authority to promulgate the Final Rule under the FTC Act (the “Act”), indicating a likely future circuit split that would need to be addressed by the United States Supreme Court.

On July 03, 2024, the Northern District of Texas issued an order in the Ryan Litigation preventing the FTC from implementing and enforcing the Final Rule as to the named parties in that suit. Subsequently, the plaintiff and plaintiff-intervenors, moved for reconsideration to expand the scope of this order to businesses outside of the named parties. The court denied these motions. On July 19, 2024, the Ryan plaintiffs filed a motion for summary judgment with full briefing on the issues to be completed by August 16, 2024. The court intends to rule on the motion on or before August 30, 2024.

While the Ryan litigation was progressing, the ATS Litigation proceeded parallelly in Pennsylvania. Like the Ryan Litigation, the ATS plaintiff alleged the FTC had no statutory authority under the Administrative Procedure Act, 5. U.S.C. §706(2)(c) to issue substantive rules and, in the alternative, if Congress did grant the FTC this authority, it was an unconstitutional delegation of legislative power in violation of Article I of the United States Constitution. On May 14, 2024, the ATS plaintiff filed a motion for preliminary injunction and stay of the Final Rule. Throughout June and July, the parties briefed the issues and conducted oral arguments, and on July 23, 2024, the Eastern District of Pennsylvania denied the plaintiff’s motion.

The Pennsylvania court’s analysis in its denial was in sharp contrast to the Texas court’s analysis in the Ryan Litigation. In the latter, the court—in granting the plaintiffs’ motions—found: (i) the plaintiffs were substantially likely to prevail on the merits of their challenge to the FTC; (ii) plaintiffs will suffer irreparable harm if no preliminary injunction is issued; (iii) the balance of harms favors the Plaintiffs; and (iv) the public interest favors issuance of a preliminary injunction. To the plaintiff’s likelihood of success, the court stated, “after reviewing the text, structure, and history of the Act, the Court concludes the FTC lacks the authority to create substantive rules through this method.”[3] To the second point, Fifth Circuit precedent dictated that “nonrecoverable costs of complying with a putatively invalid regulation” constituted an irreparable harm to the plaintiff.[4] In contrast, the court in ATS found “that Plaintiff has failed to establish irreparable harm… [and] failed to establish ‘a reasonable chance, or probability, of winning.’”[5]

In the ATS Litigation, the plaintiff argued it faced irreparable harm in two ways. First, the plaintiff asserted that it would be subject to nonrecoverable efforts to comply with the Final Rule such as the costs associated with notifying employees of its compliance with the Final Rule, costs to updates its business strategy, costs to alter its specialized training program and that it would lose employees.[6] The court rejected these argument first noting the plaintiff incorrectly relied on Fifth Circuit precedent in asserting that “nonrecoverable costs, including purely economic costs, to come into compliance with government rules and regulations are a valid basis for a finding of irreparable harm.”[7] This Fifth Circuit precedent was at odds with clear Third Circuit precedent that “nonrecoverable compliance costs are not a valid basis for a finding of irreparable harm.”[8] Further, as to potential loss of employees, the court stated “ATS has provided no evidence to meaningfully substantiate this fear.”[9] Second, the plaintiff argued that it would be deprived of its contractual rights because employees will leave and transfer the benefit of ATS’s training, investment, and confidential information to other companies. Again, the court held the plaintiff’s reliance on Fifth Circuit precedent was misplaced and explained that non-disclosure agreements were available to protect ATS’s proprietary information.[10]

Despite stating it did not need to determine—because there was no irreparable harm—whether the plaintiff would likely succeed on the merits, the court in ATS held the plaintiff was “unable to demonstrate a likelihood of success on the merits.”[11] The plaintiff argued the Act should be interpreted to limit the FTC’s rulemaking authority to procedural rules. In rejecting this argument, the court conducted a textual analysis of Sections 5 and 6 of the Act, finding “it clear that the FTC is empowered to make both procedural and substantive rules as is necessary to prevent unfair methods of competition.”[12] Additionally, the court found the FTC’s promulgation of the Final Rule consistent with congressional and judicial history as it relates to the FTC’s rulemaking authority. Finally, the court rejected the plaintiff’s alternative argument that the FTC exceeded its authority by banning all non-compete clauses. Here, the court found that: (i) the promulgation of the Final Rule was within the FTC’s rulemaking authority; (ii) state regulations of non-competes do not preclude the federal government from issuing rules on non-competes; (iii) the Major Questions Doctrine is not applicable because of the FTC’s clear authority; and (iv) Congress properly delegated authority to the FTC under the Act.[13]

The Ryan and ATS Litigation injunctive relief orders have created a paradoxical situation if the Final Rule goes into effect because as it currently stands the FTC will be unable to enforce the Final Rule as to the Ryan plaintiffs while simultaneously being able to enforce it, should it go into effect, as to all other business in the United States. As of this writing, ATS has not appealed to the Third Circuit where the results would likely be the same, however, should an appeal reach the United States Supreme Court, the justices may be eager to clarify the current circuit split on the FTC’s likelihood to succeed on the merits in an injunctive relief analysis and may be inclined to provide broader relief, especially considering both the Ryan and ATS courts claimed to root their FTC’s rulemaking authority analysis on the text, context, and history of the Act.

For now, employers should stay attuned to these matters, particularly as the court is set to rule on a motion for summary judgment by the end of August in the Ryan Litigation. We will continue to update employers on the status of the Final Rule.

[1] Ryan, LLC, v. Fed. Trade Comm’n, No. 3:24-cv-986 (N.D. Tex. April 23, 2024).
[2] ATS Tree Servs., LLC v. Fed. Trade Comm’n, et al., Case 2:24-cv-01743 (E.D. Pa. Apr. 25, 2024).
[3] Ryan LLC v. FTC, No. 3:24-CV-00986-E, 2024 U.S. Dist. LEXIS 117418, *21 (N.D. Tex. July 03, 2024).
[4] Id. at *37 (internal citation omitted).
[5] ATS Tree Servs., LLC v. Fed. Trade Comm’n, et al., Case 2:24-cv-01743, 2024 U.S. Dist. LEXIS 129398, *21 (E.D. Pa. July 23, 2024) (cleaned up).
[6] Id. at *25.
[7] Id. at *22.
[8] Id.
[9] Id. at *27.
[10] Id. at *28-31.
[11] Id. at *32.
[12] Id. at *37.
[13] Id. at *38-*47.