The Federal Trade Commission (FTC) issued its nationwide non-compete ban on April 23, 2024. The FTC later announced that the ban goes into effect on September 4, 2024. The very next day after the FTC announced the new rule, business groups filed their first lawsuit in Texas federal court, seeking in injunction (court order) to halt the implementation of the rule and seeking to invalidate the rule altogether.
Earlier this week, the FTC filed its own brief (a written legal argument) with the federal district court in Dallas, Texas. The FTC defends its ban on non-competes and pushes back at the prospect of an injunction. Procedurally speaking, the plaintiffs (Ryan, LLC and the U.S. Chamber of Commerce, the parties who brought the lawsuit) will have a chance to respond in the coming few weeks. Then the court will decide whether to have a hearing or whether to just issue a decision based on the parties’ written legal arguments. Regardless, it’s likely that a ruling would be issued in July 2024.
What are the FTC’s Arguments in Support of the Non-Compete Ban?
In order to get an injunction (and prevent the rule from going into effect while the lawsuit continues), the parties seeking the injunction must prove several elements: (1) that they are likely to succeed on the merits of this claim (i.e., that the rule is likely to be struck down); (2) employers will not face irreparable harm if the rule goes into effect while the lawsuit about the underlying rule’s success continues; and (3) the balance of equities and public interest disfavor an injunction.
Success on the Merits
On the merits issue, the FTC argues that Congress gave authority to the FTC under the FTC Act to prevent unfair methods of competition in or affecting commerce, which would include when employers use non-compete agreements. Part of the FTC’s authority comes through rulemaking, which is the power to issue rules and regulations to carry out the FTC’s congressional mandate. Given that all non-compete agreements are a method of competition (or a means to actively prevent free and open competition in the marketplace) and tend to negatively affect competition in labor, product, and service markets, the FTC argues that this new rule is permitted by existing law.
Irreparable Harm
As to irreparable harm, this phrase means that the plaintiffs complained that if the rule goes into effect but is later overturned by a higher court, then businesses will be harmed by having to comply with the rule in the meantime. And such harm must be irreparable, meaning it cannot be compensated with mere money. Of course, all non-compete litigation is about money, lost profits primarily, which is readily understood through some basic math, so any harm is hardly irreparable. The FTC further notes that any harm would come from a business seeking to enforce a non-compete in violation of the rule would be self-inflicted and thus not irreparable under that argument either.
Public Interest and Balance of Equities
Finally, the FTC argues that the “balance of equities and the public interest” are not in favor of an injunction. Rather, the economic benefits to the non-compete ban would result in new businesses being formed (since employees could leave and start new businesses to compete in the open marketplace instead of being frozen out for several years due to a non-compete agreement), more innovation, higher wages for employees, and would protect the “fundamental freedom of workers to pursue employment.”
What Does this Mean for South Carolina Employees with an Existing Non-Compete?
Nothing new yet. Regardless of how the court decides, the rule is still not in effect and won’t be until September 4, so I would advise South Carolina employees to seek the advice of a SC non-compete lawyer in determining whether their specific non-compete agreement would be enforceable under existing South Carolina law.
We should know more in the coming weeks as we get closer to a hearing or to the court’s decision on the preliminary injunction. I’ll keep you all updated as those events unfold.
