A federal judge has pressed pause on the U.S. Chamber of Commerce’s lawsuit challenging the Federal Trade Commission’s non-compete ban, issuing a stay in Chamber of Commerce of the U.S. v. FTC.
Background
On April 23, 2024, the Federal Trade Commission (FTC) issued a final rule banning non-compete agreements. The final rule made clear “that it is an unfair method of competition—and therefore a violation of section 5—for persons to, among other things, enter into non-compete clauses (“non-competes”) with workers on or after the final rule’s effective date.”
On the same day as the ruling, Ryan, a global tax services and software provider with its principal place of business in Dallas, Texas, issued a legal challenge to the new rule, filing suit in the U.S. District Court for the Northern District of Texas.
(For more background on the ban and the Ryan case, click here.)
It was the first suit filed to counter what the company described as “the FTC’s lawless action, which imposes an extraordinary burden on businesses seeking to protect their intellectual property (IP) and retain top talent within the professional services industries.” The purpose of the suit, the company says, is “to prevent the immense, undue burdens the FTC’s rule would impose on service-driven companies of every size nationwide.”
After Ryan filed suit, four associations filed a lawsuit against the FTC:
- According to its website, the Chamber of Commerce of the United States (USCOC) is the world’s largest business organization, with members including small businesses, chambers of commerce, leading industry associations, and global corporations.
- The Business Roundtable is an association of more than 200 chief executive officers of America’s leading companies, representing every sector of the U.S. economy.
- The Longview Chamber of Commerce is a voluntary organization of business and professional men and women who have joined together to improve business, tourism, downtown Longview potential, and the overall quality of life in Longview, Texas.
- The Texas Association of Business (TAB) is the Texas State Chamber, representing companies of every size and industry. TAB also serves as the state-designated affiliate of the National Association of Manufacturers (NAM) and the U.S. Chamber of Commerce. (Ryan, the plaintiff in the first lawsuit, is also a member of TAB, a fact which was disclosed according to court rules.)
The joint lawsuit was filed in the U.S. District Court, Eastern District of Texas.
(On April 25, 2024, a third lawsuit was filed by ATS Tree Services, based in Bucks County, Pennsylvania, in the U.S. District Court for the Eastern District of Pennsylvania. That lawsuit is not impacted by this ruling.)
FTC Procedures
The FTC’s final rule followed publication of the proposed non-compete clause rule, introduced on January 19, 2023. The FTC reported that it received over 26,000 public comments about the proposed rule, with over 25,000 expressing support.
“Based on its own data analysis, studies published by economists, and the comment record,” the FTC found that non-competes are in widespread use throughout the economy. The Commission estimated that approximately one in five American workers—or approximately 30 million workers—are subject to a non-compete.
Legal Arguments
The legal arguments raised by the Chamber and its co-plaintiffs in their lawsuit are similar to those raised by Ryan. Among other things, they argue that the FTC lacks the authority to issue substantive rules or to ban non-compete clauses. Additionally, they argue that the FTC acted “contrary to law by retroactively invalidating non-compete clauses without individualized consideration like that envisioned by the Fifth Amendment.”
Under the final rule, employers will be required to notify those workers bound by an existing non-compete that they will not be enforcing any non-competes against them (with the exception of certain carve outs). According to Ryan’s initial lawsuit, the move would retroactively invalidate 30 million employment contracts. That, the Chamber and its co-plaintiffs argue, is an improper use of the agency’s authority.
Stay
Judge J. Campbell Barker granted the FTC’s motion to apply the first-to-file doctrine. The first-to-file rule is invoked when two parties file what is essentially the same suit in the federal system but in different jurisdictions. It is possible that there could be two different outcomes (made even more complicated by Ryan’s involvement in both suits). And while both were filed in different districts in Texas, they would end up in the same place—the Fifth Circuit—following any appeal. The first-to-file rule does what it sounds like and gives the first party to file priority over matters filed afterwards.
As a result, Judge Barker issued a stay in the Chamber of Commerce matter. A stay is an action to stop a legal proceeding. A stay is normally only temporary—think of it like a pause—until something else happens.
The Chamber and other parties now have the option to intervene in or join Ryan’s case. None of the plaintiffs immediately responded to requests for comment.
The FTC declined to comment on the stay.
The case is Chamber of Commerce of the U.S. v. FTC (E.D. Tex., No. 6:24-cv-00148).
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