FTC non-compete ban: Life after Loper and Chevron deference?

On June 28, 2024, the U.S. Supreme Court in Loper Bright Enters. v. Raimondo, 144 S. Ct. 2244 (2024), overruled the decades-long Chevron deference doctrine. Under Chevron USA Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984), courts were directed "to defer to 'permissible' agency interpretations of [ambiguities in] statutes those agencies administer--even when a reviewing court reads the statute differently." In its 6-3 Loper Bright decision, the Court instead held that courts "may not defer to agency interpretation of the law simply because a statute is ambiguous." Loper Bright v. Raimondo at 62. The end of Chevron deference has raised critical questions about the viability of the Federal Trade Commission's (FTC) recent Final Non-Compete Clause Rule (Rule). This Rule, which assumes "express authority in the statute" to broaden competition regulation, already is encountering several judicial challenges. This begs the question: Is there life for the Rule after Loper Bright?

BACKGROUND

The FTC Rule was issued by a 3-2 vote on April 23, 2024, and is slated to become effective on Sept. 4, 2024. The Rule prohibits most post-employment non-compete clauses between employers and their workers, with narrow exceptions for non-competes entered into in the context of a sale of business. For now, it requires employers (except the Ryan plaintiffs, see below) to provide notice to all employees that existing non-compliant non-competes will be invalidated or will not be enforced by September 4, 2024. 


On July 3, 2024, the Rule hit its first judicial hurdle in Ryan v. FTC, No. 3:24-cv-00986 (N.D. Tex. 2024) ("Ryan"). The Northern District of Texas issued a preliminary injunction barring the FTC from implementing or enforcing the Rule pending a final order on the merits. The court analyzed the "text, structure, and history of [Section 6(g) of the FTC Act]" and concluded that the FTC lacked authority to issue the Rule because the agency did not have "substantive rule making power with respect to unfair methods of competition." Id. at 15-19. It declined to issue a nationwide injunction and limited its relief to the Ryan plaintiff and plaintiff-intervenors. The court intends to issue a ruling on the merits by August 30, 2024.


Although the Ryan ruling came days after Loper Bright, it did not heavily rely on Loper Bright. This is not surprising given that courts already declined to give formal deference to antitrust agencies' interpretation of antitrust statutes during the Chevron era. Indeed, the FTC did not argue for Chevron deference in Ryan, and the district court merely cited Loper Bright for the proposition that a court must look to the intent of the legislature and must construe the statute so as to give effect to that intent." Ryan v. FTC at 7.


On July 23, 2024, in ATS Tree Services v. FTC, No. 24-1743 (E.D. Pa. 2024) ("ATS"), the Eastern District of Pennsylvania declined to issue a preliminary injunction, finding that the plaintiff had not demonstrated irreparable harm or a likelihood of success on the merits. ATS had challenged the FTC's authority to promulgate the Rule and argued that non-competes were necessary to its training-based business model. The ATS court found that the FTC had statutory authority to promulgate substantive rules as to unfair methods of competition based on the plain text of the statute. Id. at 27. ATS cited Loper Bright only for the proposition that courts are required to exercise their independent judgment in deciding whether an agency has acted within its statutory authority. Id. at 25.


This small sample from pending challenges indicates that the direct impact of Loper Bright on the Rule is not clear. The lack of certainty, of course, raises concerns for employers attempting to determine their compliance obligations before the Rule's Sept. 4, 2024 effective date.

WHAT SHOULD EMPLOYERS DO NOW?

The pending legal challenges will likely proceed to the Third and Fifth Circuits, and then to the Supreme Court. The Supreme Court's recent term and hostility to agency interpretation and rulemaking does not bode well for the FTC's expansive views of its rulemaking powers. Loper Bright has made clear that it will now be the responsibility of the judicial branch to monitor, and if necessary, reject the asserted interpretations of administrative agencies. This change indicates that the Court will likely exhibit skepticism, if not antagonism to the FTC's broad interpretation of its rulemaking authority to curb unfair competition.


At least three variables may inform what employers choose to do next based on their risk tolerance: 1) a final ruling on the merits in Ryan could broaden the scope of relief; 2) appeals in ATS or Ryan could seek emergency relief; 3) a third challenge in Properties of the Villages, Inc. v. Federal Trade Commission (M.D. Fla. 2024) could entirely halt the Rule. Despite these developments, the FTC Rule remains set to take effect on September 4, 2024. And there are steps that employers can do to prepare in the event the Rule does become effective.:


Remain aware that the effective date of the Rule remains Sept. 4, 2024, for all employers other than the plaintiffs and plaintiff-intervenors in the Ryan case.
Determine their risk tolerance and plans of action during this time of judicial deliberation with employment and trade secret experts.
Consider what to do with senior executives who currently are not subject to non-compete agreements.
Review existing agreements with workers and assess the extent to which these agreements would be deemed non-competes under the FTC Rule.

Eric Akira Tate is a partner and co-chair of the Global Employment and Labor Practice, Bonnie Lau is an antitrust partner, and Maya King is a summer associate at Morrison & Foerster LLP.