Trump FTC could end unauthorized federal takeover of employment noncompete agreements

OPINION:

By dismissing the two federal cases finding the Federal Trade Commission’s noncompete ban unenforceable, the Trump FTC could close the door on a legally unauthorized federal takeover of employment noncompete agreements. In doing so, it could end an exhausting trail of administrative agency overreach under the last administration.

The proposed FTC noncompete clause, which would have banned most employment noncompete agreements nationwide, was scheduled to become effective Sept. 4, 2024. However, an intervening order entered on July 3, 2024, by a Texas federal district court in Ryan LLC v. FTC entered a nationwide injunctive ban on the rule.

U.S. District Court Judge Ada Brown, holding that the FTC ban was void and unenforceable, found that the agency exceeded its delegated authority and was arbitrary and capricious.

The Texas case has been appealed to the 5th U.S. Circuit Court of Appeals, but the FTC, under the control of new leadership, requested and was granted a 120-day stay of the appeal, which expired on July 10. However, the FTC sought and obtained an additional extension to Sept. 8 to provide a status report to the court.

In Properties of the Villages v. FTC, the agency obtained a stay in a Florida federal middle district court appeal to the 11th U.S. Circuit Court of Appeals, which was set to expire on July 18. The FTC sought and obtained an extension until Sept. 16 to provide a status report to the court.

The Properties of the Villages case also held that the FTC noncompete ban was unenforceable, but it did not grant a universal injunction. It was limited to the parameters of the dispute.

The stays in both cases were ostensibly requested so the FTC would have time to consider whether to proceed with the appeal.

While serving as a commissioner, new FTC Chair Andrew Ferguson was a vocal opponent of the noncompete rule, casting a vote against its 3-2 adoption. However, since being appointed chair, Mr. Ferguson and new FTC Commissioner Mark Meador have been sending mixed signals about the vigor of future FTC opposition to noncompetes.

Surprisingly, Mr. Ferguson issued a memo on Feb. 26 establishing a joint labor task force to focus on noncompetes. Mr. Meador urged aggressive action against noncompete abuse during his Feb. 25 Senate confirmation hearing.

Whether this proclaimed aggressive policy against noncompetes will propel the FTC’s new leadership to proceed with the appeals in the Ryan and Properties of the Villages cases is arguably an open question. However, on Aug. 13, President Trump issued an executive order revoking President Biden’s July 9, 2021, executive order promoting aggressive federal agency rulemaking to ban noncompetes. This new executive order dims the prospects of the FTC’s continuation of the 5th and 11th Circuit appeals.

The Supreme Court’s June 27 ruling in Trump v. CASA Inc., which restricted the scope of lower federal court injunctions, has added a potentially new dimension to the Ryan appeal because of the Ryan court’s issuance of a universal injunction.

Although the court does not expressly designate the holding in Trump v. CASA Inc. as retroactive, since the case is still alive on appeal, a pivotal question remains: Will the appellate court, even if confirming Judge Brown’s holding concerning the rule’s validity, issue an order limiting the scope of the injunction? This would resuscitate the FTC noncompete rule for the rest of the nation.

Although the law of the case on appeal is generally closed upon the lower court’s judgment, the U.S. Supreme Court recognized an exception to the general rule in Carpenter v. Wabash Railway Co., a 1940 case still followed today. The exception provides that the appellate court must apply an intervening change in the law between final judgment and appeal.

A decision by the 5th Circuit overruling the universal injunction in Ryan would create a legal quagmire, imposing the federal noncompete ban throughout the nation except in the confines of piecemeal litigation.

This potential quagmire could be avoided if the new FTC leadership follows Mr. Trump’s lead in revoking the Biden executive order promoting expansive administrative rulemaking and dismisses the Ryan appeal and the Properties of the Villages case.

• William Constangy is a retired North Carolina Superior Court judge, an active employment arbitrator and the author of “Noncompete Law,” a national legal treatise, and numerous law review and other articles on employment law.