By Ami J. Patel*
On April 23, 2024, the Federal Trade Commission (“FTC”) voted 3-2 to pass a new rule that virtually bans all non-compete clauses as were ported in a prior Alert. The two dissenting Commissioners asserted that the FTC does not have the power to pass this new rule and anticipated litigation has followed based on that very assertion.
On April 24, 2024, the United States Chamber of Commerce filed a lawsuit which challenged the FTC’s authority. The Chamber filed a Complaint in the United States District Court Eastern Division of Texas against the FTC and Lina Khan in her official capacity as Chair of the FTC. The Chamber was joined by three other business groups: the Longview Chamber of Commerce, the Business Roundtable, and the Texas Association of Business.
The Chamber’s complaint is based on several assertions:
- the Commission does not have the substantive rulemaking authority under Sections 5 and 6 of the Federal Trade Commission Act to enact this rule;
- this enactment is based on an unlawful interpretation of “unfair methods of competition”;
- the regulation constitutes unconstitutional delegation of Congressional rulemaking authority;
- this regulation creates a form of unlawful retroactivity;
- the FTC failed to engage in “Reasoned Decision Making” as required by the Administrative Procedure Act (“APA”), and;
- the FTC failed to consider alternative proposals.
The Chamber has also filed a Motion of Stay and Preliminary Injunction to stop enforcement of the FTC’s new rule while the Court considers the merits of the Chamber’s claims. The FTC has until May 15, 2024 (21 days) to respond to the Chamber’s Complaint and Motion to Stay. After the Chamber’s opportunity to respond, the Court should determine whether to enjoin the FTC’s rule while the Court decides the merits of the Chamber’s case.
Another lawsuit has been filed by Ryan, a tax services and software firm, asserting that the new rule places a tremendous burden on companies looking to maintain top people in the professional services sectors and safeguard their intellectual property (IP). Ryan aims to stop what it believes are unjustified restrictions that the FTC's regulation would have on service-oriented businesses across the country, regardless of size. We anticipate many more lawsuits to come challenging the FTC’s new rule.
What Now For Employers?
As we stated in a prior alert, Employers should not panic! Employers should continue to assess their current use of non-competes, non-solicitation provisions, and non-disclosure agreements to identify changes, adjustments, and notices. However, employers do NOT need to make any changes as of now. Stay tuned and we will update you on any future developments on this matter.*Please contact ZR’s Practice Leader of its Non-Compete/Trade Secret practice, Ami J. Patel (ajp@zrlaw.com) at 216-696-4441 if you have questions relating to the FTC’s new Non-Compete Rule and need assistance with review of your existing agreements.