On May 7, 2024, the Federal Trade Commission (FTC) published a final regulatory rule that, if it takes effect as planned, which is currently scheduled for September 4, 2024, would invalidate and ban virtually all non-compete agreements in the U.S. Following publication of the rule in the Federal Register, legal challenges were promptly filed in Texas and Pennsylvania federal courts (another challenge was filed in Florida federal court in June). Motions seeking to preliminarily enjoin the final rule from taking effect followed, with the petitioners in each case arguing, among other things, that the FTC lacks authority to issue substantive rules concerning workplace non-compete agreements and, also, that the FTC did not sufficiently tailor the rule to the claimed purpose underlying it (by essentially issuing a blanket non-compete ban).

The first jurist to weigh in was Judge Ada Brown of the U.S. District Court for Northern District of Texas, who issued a decision on July 3, 2024 concluding that “the text and the structure of the FTC Act reveal the FTC lacks substantive rulemaking authority with respect to unfair methods of competition. The court concludes the commission has exceeded its statutory authority in promulgating the noncompete rule, and thus plaintiffs are likely to succeed on the merits.” On this basis, the court issued a preliminary injunction staying enforcement of the final rule (though, notably, the court limited its decision to cover just the petitioning parties in the case, rather than issuing a nationwide injunction as had been requested). The court also noted that it intends to issue a decision regarding the ultimate merits of the case – i.e., the plaintiff’s request for a permanent, nationwide injunction of the final rule – by August 30, 2024. Given the strong language in the court’s decision, however, it appears a virtual lock that the forthcoming ruling from Judge Brown, which could still potentially have nationwide application, will similarly conclude that the FTC exceeded its authority in issuing the rule.

Twenty days later, however, Judge Kelley Brisbon Hodge of the U.S. District Court for the Eastern District of Pennsylvania reached the opposite conclusion. In a 39-page decision issued on July 23, 2024, Judge Hodge found that the petitioning business had failed to demonstrate that it was likely to eventually succeed on the merits of its argument that the FTC lacks the authority to issue “procedural and substantive rules as is necessary to prevent unfair methods of competition.” According to Judge Hodge, the FTC Act does not limit the commission’s rulemaking power to issuing “exclusively procedural rules.” On the contrary, Judge Hodge concluded, the FTC has the power to issue substantive rules concerning the use of non-competes by U.S. businesses.

Accordingly, there presently exists a judicial divide over the constitutionality of the FTC’s final rule – though the Texas and Pennsylvania rulings are almost assuredly just the first step in the legal process. Appeals to the Fifth and Third Circuit Courts of Appeals, respectively, are likely to follow in short order, with the rule’s ultimate fate likely destined to be decided by the U.S. Supreme Court.

That said, with the rule’s effective date rapidly approaching and in the absence of a nationwide injunction of the rule having yet been issued or the FTC voluntarily agreeing to delay said effective date while the legal process plays out, we have prepared a list of recommended next steps U.S. businesses may want to consider taking between now and September 4, 2024.