On April 23, 2024, the Federal Trade Commission (“FTC”) approved a broad rule that bans a large majority of non-compete clauses between employers and their workers (the “Rule”). (Read our April 2024 article about the details of the Rule here). The Rule would render future non-compete agreements violative of Section 5 of the FTC Act and make existing non-compete agreements unenforceable. The ban was set to become effective on September 4, 2024, but it was blocked on August 20, 2024, by a decision from the U.S. District Court for the Northern District of Texas.
Employers increasingly use written employment agreements in the construction industry for crucial roles, including superintendents, project managers, business development managers, and senior project executives. Contractors, especially those with skilled trades, allocate substantial resources to developing employees who can secure business and manage construction projects effectively. In support of similar business interests, a successful legal challenge has been launched against the Rule in federal court.
The first salvo was brought by Ryan LLC, a tax firm, in the Northern District of Texas on April 23, 2024—the same day the FTC approved the Rule. Ryan, LLC v. Federal Trade Comm’n, Case No. 3:24-cv-00986. The U.S. Chamber of Commerce catapulted its suit the next day in the Eastern District of Texas and intervened to join the Ryan LLC lawsuit in the Northern District of Texas. Chamber of Commerce of the United States of America, et al. v. Federal Trade Comm’n, Case No. 6:24-cv-00148. The Rule’s opponents asserted the FTC lacked the authority to write regulations defining “unfair methods of competition.” They also highlighted that non-competes are widely used and generally enforced under state law. The Rule, therefore, reflected an arbitrary and capricious exercise of the FTC’s powers.
The Northern District of Texas granted a preliminary injunction and stayed enforcement of the Rule on July 3, 2024. The initial ruling was narrow as it only applied to Ryan LLC and the U.S. Chamber of Commerce. But on August 20, 2024, the Northern District of Texas issued a permanent injunction against the Rule. The FTC is now blocked from enforcing the Rule nationwide. The Court found that the “FTC exceeded its statutory authority in implementing the Rule, and the Rule is arbitrary and capricious.” The Court concluded that it must “hold unlawful” and “set aside” the FTC’s Rule under § 706(2) of the Administrative Procedure Act.
The FTC argued that the Court’s ruling should be limited to the named parties. The Court rejected FTC’s argument, reasoning that § 706 has ‘nationwide effect,’ is ‘not party-restricted,’ and ‘affects persons in all judicial districts equally.’”
There is at least one competing and opposite view in the federal judiciary. ATS Tree Services, LLC v. Federal Trade Comm’n, et al., Case No. 2:24-cv-01743 is a legal challenge brought in the U.S. District Court for the Eastern District of Pennsylvania on April 25, 2024. The Eastern District of Pennsylvania reached an opposite conclusion, denying ATS Tree Services, LLC’s request for a preliminary injunction and refusing to stay the Rule’s enforcement on July 23, 2024. The court ruled that ATS Tree Services, LLC failed to establish a reasonable likelihood of success on the merits and irreparable harm. The Eastern District of Pennsylvania did not address the Ryan LLC case.
The FTC may appeal the Northern District of Texas’ decision to the U.S. Court of Appeals for the Fifth Circuit and has 60 days, or until Oct. 19, 2024, to do so. The FTC could also seek a stay of the judgment pending an appellate decision. Following the Ryan LLC decision, on September 6, 2024, ATS filed a motion to temporarily stay their case in the Eastern District of Pennsylvania pending “the earliest of the following events: (1) the expiration of time for the Commission to file a notice of appeal of the final judgment in Ryan LLC; (2) if the Commission appeals the Ryan LLC Judgment, a decision on the merits from the U.S. Court of Appeals for the Fifth Circuit; or (3) any other event that changes the effectiveness of the Ryan LLC Judgment as to ATS.” The motion notes that the FTC opposes a stay. ATS could have dismissed the action and relied on the current ruling in Ryan LLC, but it appears ATS desires to retain the ability to move forward in the event the Ryan LLC judgement is reversed. Not dismissing the action may leave the door open for the Court to issue an opinion disagreeing with the Ryan LLC decision. Other litigation may also put the Rule’s validity before the Eleventh Circuit. The inconsistency between federal courts increases the likelihood of a circuit court split. In sum, the Rule’s future seems destined to be resolved by the U.S. Supreme Court, where the FTC’s success in defending the Rule on the merits will be complicated.
For now, the effect of the Ryan LLC decision on active litigation in Pennsylvania and other jurisdictions is uncertain. But the Rule’s effective date of September 4, 2024, is null and void. The Rule remains unenforceable for now.
The current Supreme Court has been hostile to administrative rulemaking. This anti-regulatory bent was spearheaded in 2022 with West Virginia v. EPA. (West Virginia v. Environmental Prot. Agency, 597 U.S. 697 (2022).) This case announced the novel “major questions” doctrine, a principle of statutory interpretation in United States administrative law. The doctrine bars agencies from resolving questions with “vast economic and political significance” absent explicit statutory authorization. Since then, the federal judiciary has liberally invoked the “major questions” doctrine to strike down several administrative rules.
The recent Loper Bright decision from June 28, 2024, pushed the anti-regulatory trend further. Loper Bright Enterprises v. Raimondo, 144 S. Ct. 2244 (2024). Loper Bright overruled long-standing precedents under which courts gave deference to federal agencies’ statutory interpretation of their power to promulgate certain rules. This was known as “Chevron deference.” (Read our article regarding the Loper Bright decision here). Without Chevron deference, determining the FTC’s statutory authority to promulgate the Rule rests solely within the federal judiciary’s bailiwick and its current anti-regulatory climate.
Despite the uncertainty, construction industry employers may consider alternative methods to protect their interests. Such examples might include: i) adopting strict confidentiality policies and training concerning handling and using trade secrets; ii) non-disclosure and non-solicitation agreements; iii) training repayment agreements; and iv) limiting access to confidential business information and technology. When considering such alternative measures, employers should consult with competent legal counsel.
Smith Currie Oles is here to advise and answer any questions and concerns and help construction employers protect their interests. We will continue to provide legal updates on the issue to keep employers informed.
Smith Currie Oles provides comprehensive legal services to all parts of the construction industry across the nation. Smith Currie lawyers have decades of demonstrated success representing construction and federal government contracting clients “From the Ground Up,” including procurement matters, contract formation and negotiation, project administration, claims prosecution and, when necessary, in litigation and other forms of dispute resolution.
The views expressed in this article are not necessarily those of ConsensusDocs. Readers should not take or refrain from taking any action based on any information without first seeking legal advice.