For those keeping score at home, it is now 2-1: two judges have found the FTC’s noncompete ban is invalid, and one judge has found it is valid.
Judge Timothy Corrigan of the United States District Court for the Middle District of Florida joined the former group. He issued a preliminary injunction order last Thursday in which he enjoined the FTC from implementing or enforcing its noncompete ban on the grounds that the ban exceeds its rule-making authority. However, the injunction is only as to the Plaintiff, so the ruling does not resolve the uncertainty facing employers with the effective date of the ban fast-approaching on September 4, 2024.
Properties of the Villages, Inc. v. Federal Trade Commission
The case is Properties of the Villages, Inc. v. Federal Trade Commission. The plaintiff Properties is a real estate broker whose agents are subject to non-compete clauses. Properties filed suit against the FTC bringing four counts under the Administrative Procedure Act and alleging violations of the federal Constitution. Properties alleges that:
- The FTC does not have substantive rulemaking authority over unfair methods of competition;
- Even if the FTC has substantive rulemaking authority, its non-compete ban exceeds that authority;
- Even if the FTC has substantive rulemaking authority, the ban is impermissibly retroactive;
- The FTC non-compete ban violates the commerce clause.
Properties also filed a motion for preliminary injunction, requesting that the court enjoin the FTC from enforcing the ban against it and seeking a stay of the ban.
On August 13, 2024, the Court conducted a hearing on Properties’ request for a preliminary injunction. At the conclusion of the hearing, the court issued an extensive ruling from the bench, followed shortly by a preliminary injunction order to which it attached a copy of the hearing transcript in which its reasoning for its decision is set forth in detail.
As set forth in the transcript, the court first addressed whether the FTC has statutory rulemaking authority over unfair methods of competition. Citing to the recent ATS Tree Services, LLC v. Federal Trade Commission decision issued by a Pennsylvania federal court on July 23, 2024, the court held that “Congress gave the FTC authority to ‘prevent’ unfair methods of competition, not just go after someone who already engaged in it, and that authority resides in Section 6(g)” of the FTC Act (15 U.S.C. § 46(g)).
The Court then addressed whether the noncompete ban violates the commerce clause among other constitutional challenges. Even though it indicated that the Plaintiff’s constitutional challenges were “arguable,” it summarily concluded that Properties had not demonstrated a substantial likelihood of success on the merits of any of them.
The Court also concluded without much discussion that Properties had not shown a substantial likelihood of prevailing on the merits on its claim that the non-compete ban was improperly retroactive.
The Court went on to determine, however, in contrast to the ATS court, that the Supreme Court’s “major questions doctrine” applied. The Court found that a major question was implicated by the FTC ban “given the sweep and breadth of the final rule, including its application to existing contracts.”
Noting that the FTC has never exercised its Section 6(g) rulemaking power “in the scope and manner that it seeks to do with the final rule,” the Court ultimately held that the noncompete ban exceeded the FTC’s rule making authority. According to the Court:
Borrowing from Justice Barrett’s concurring opinion in Biden v. Nebraska, if a parent gives a babysitter a credit card and says “make sure the kids have fun while we’re out,” the parent might expect that the babysitter would take the kids out for ice cream, but would not expect the babysitter to take the kids on an overnight trip to Las Vegas. Likewise here: Without clear Congressional permission, the final rule, the FTC’s equivalent of a trip to Las Vegas, is unauthorized.
While Judge Corrigan’s order was a preliminary ruling, he will presumably issue a final ruling that the FTC noncompete ban is invalid.
What are the broader implications of the Court’s ruling?
With this decision, the split widens. As discussed in our prior blogs, a Texas federal district court issued a preliminary ruling on July 3 holding that the FTC’s noncompete ban is invalid, and it is now joined by the Florida district court in the Properties case. A Pennsylvania federal district court reached the opposite conclusion in the ATS case.
Presumably the Fifth, Third, and Eleventh Circuit Courts of Appeal will eventually review each of these decisions. The Supreme Court is likely to ultimately make the final determination about the validity of the FTC’s rule.
Does this decision impact my business or noncompete?
The preliminary injunction order in the Properties case only enjoins the FTC from implementing or enforcing its ban against the plaintiff Properties – it is not a nationwide injunction. Like the orders issued in the Texas and Pennsylvania cases that have addressed the validity of the FTC ban, the Properties order is only applicable in the context of that lawsuit.
The FTC’s noncompete ban rule remains in place while these cases continue to get litigated. A final ruling in the Texas case is expected by August 30, 2024.
The FTC’s rule requires employers to notify current and former employees that their noncompetes cannot be enforced. The notice must be provided by the effective date of September 4, 2024.
As indicated in our prior blog, employers should prepare to send the required notices, but should seek guidance from counsel about the appropriate steps based on where they conduct business and the evolving status of the lawsuits challenging the rule. Employees that are subject to noncompetes should also seek guidance if they have questions.
BFV will continue to monitor the lawsuits challenging the FTC’s rule and keep you informed of any new developments. In the meantime, please feel free to contact us with any questions about how you or your business should proceed in light of the FTC’s rule and the pending cases.
