Several Cases Have Now Entered the Covenant Not to Compete Fray

By way of background, on April 23, 2024, the Federal Trade Commission (FTC) issued a final rule to, in their words, “promote competition by banning noncompetes nationwide, protecting the fundamental freedom of workers to change jobs, increasing innovation, and fostering new business formation.”¹

The new rule defines a noncompete clause as “a term or condition of employment that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from (1) seeking or accepting work in the United States with a different person where such work would begin after the conclusion of the employment that includes the term or condition; or (2) operating a business in the United States after the conclusion of the employment that includes the term or condition.”²

As suspected, this very invasive rule has drawn lawsuits like honey draws flies.  Some preliminary rulings have now begun, and there are three such cases of note. The most recent order was issued on Aug. 15, 2024, by U.S. Federal Judge Timothy J Corrigan³ in a Florida case where the plaintiff, the Properties of the Villages Inc., a real estate brokerage firm, alleged that the FTC did not have substantive rulemaking authority over unfair methods of competition and three additional related complaints.

On July 2, 2024, the plaintiff filed a motion seeking to preliminarily enjoin enforcement of the new rule against it and seeking a stay of the September 4 effective date. While agreeing that the FTC can make some substantive rules, the judge noted that the ban has a “huge economic impact” and that regulation of noncompete clauses has historically been reserved to state governments. The judge determined that this case violated the Major Questions Doctrine. With a lengthy explanation of his examination of the law and case law, the judge granted the motion for a preliminary injunction but limited its application to this plaintiff only and noted that it did not apply nationally or to any other plaintiff in any other case.

Prior to this ruling, a federal judge in Texas also issued a preliminary injunction in a similar case^4,5 in early July 2024. The judge in that case also concluded that the FTC had exceeded its rulemaking authority, noting that “Congress vested the Commission with the power to promulgate substantive rules regarding only unfair or deceptive acts or practices, not unfair methods of competition.” This same issue was discussed in the Florida case. It is difficult to see how a noncompete covenant is an unfair method of competition. Notwithstanding the arguments the FTC put forth in both cases, it seems to be a mountain too high to climb to prove that premise.

In a case later in July, the FTC prevailed in a similar case in Pennsylvania.⁶ In that case, the motion for a preliminary injunction was denied. This potentially sets up a throw down at the Supreme Court with a split in Circuit Court decisions, though the Courts of Appeal has not yet weighed in. Lurking behind all of this is the recent Supreme Court decision in Loper,⁷ which overruled the Chevron deference case and now allows the courts to provide greater scrutiny over federal agencies on questions of their statutory authority.

In my opinion, this rule banning noncompetes has been an intrusion into the operations of the U.S. economy that is unprecedented. I am hopeful that the Supreme Court will ultimately set aside this disruptive rule. If it is not, it could embolden the FTC and other agencies to meddle in the operations of a free economy in the United States.

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¹ The rule was to become effective on Sept. 4, 2024.
² There are separate rules for common  workers, i.e., those other than senior executives and senior executives. The focus here is on the other than senior executives referred to as “common workers.” 
³ In the United States District Court Middle District of Florida Jacksonville Division Properties of the Villages, Inc., Plaintiff, vs. Federal Trade Commission, Defendant. Jacksonville, Florida Case No. 5:24-cv-316-TJC-PRL Aug. 14, 2024.