July 10, 2024, Covington Alert

On July 3, 2024, Judge Ada Brown of the United States District Court for the Northern District of Texas granted the motions for a preliminary injunction—filed by Ryan LLC (“Ryan”) and several trade associations, including the U.S. Chamber of Commerce (“Chamber”)—to prevent the FTC’s rule banning non-compete clauses from going into effect, but the court’s order only applies to the named plaintiffs (i.e., it is not a nationwide injunction). The court has indicated that it will issue a final order on the merits by August 30, 2024, just a few days before the FTC’s rule is scheduled to go into effect on September 4. It is possible that Judge Brown enjoins the non-compete ban nationwide in her final order.

Background

In April, the FTC issued a final rule banning almost all non-competes with U.S. workers, with narrow exceptions, pursuant to its claimed authority to issue competition-related rules under Sections 5 and 6(g) of the FTC Act. That same day, Ryan challenged the FTC’s rule and, shortly thereafter, filed a motion to stay and preliminarily enjoin the rule, arguing that the FTC has no statutory authority to promulgate the rule, that the rule is the product of an unconstitutional exercise of power, and that the FTC’s acts were arbitrary and capricious. The Chamber and other trade groups intervened as plaintiffs on May 8, making substantially the same arguments.

The Order

In its Order, the court found that the Plaintiffs had demonstrated a likelihood of success that (1) the FTC does not have the statutory authority to engage in competition-related rulemaking, (2) the non-compete rule is arbitrary and capricious, and (3) the plaintiffs and intervenors had satisfied the standard to obtain injunctive relief.

First, the court held that the FTC Act does not authorize the FTC to promulgate substantive competition-related rules based on the plain text, structure, and location of Section 6(g), as well as the history of the FTC Act. Instead, Judge Brown found that Section 6(g) is a “housekeeping statute” that only authorizes the FTC to issue procedural rules. For example, while Congress historically has prescribed sanctions or penalties when authorizing rulemaking, Section 6(g) contains no such provision. Furthermore, for the first 48 years of the FTC Act, until 1962, the FTC did not promulgate any substantive competition-related rules, and it has not done so since 1978. The court also explained that because amendments to the FTC Act expressly allowed substantive rulemaking for specific subjects, any interpretation that Section 6(g) conferred such rulemaking power would render the amendments superfluous.

Second, the court found that the FTC’s promulgation of the non-compete rule is substantially likely to be arbitrary and capricious because it is “unreasonably overbroad without a reasonable explanation.” Noting the FTC’s lack of supporting empirical evidence, the court characterized the rule as a “one-size-fits-all approach with no end date, which fails to establish a rational connection between the facts found and the choice made.” The court also found that the FTC did not sufficiently consider alternative avenues to the rule.

Third, the court determined that the Plaintiffs would suffer irreparable harm—namely, nonrecoverable costs required to counteract and update all existing non-compete agreements—and that the balance of equities and public interest weighed in favor of relief.

The Scope of Relief

While Ryan requested nationwide injunctive relief, the court limited the scope of the injunction to Ryan and the Chamber, though not its members. The court noted that no party had briefed why nationwide relief was necessary, and the Chamber had not briefed associational standing such that relief could be granted to its members.

Takeaways

The Order suggests that the court likely will invalidate or enjoin the rule when it issues its final order on the merits on August 30. However, it is unclear whether the rule will be invalidated/enjoined entirely or stayed only with respect to the plaintiffs/intervenors involved in the litigation.

To the extent you have questions about how the rule or the court’s Order could impact you, please contact one of the Covington attorneys identified in this alert.

Photo of Lindsay Burke Lindsay Burke

Lindsay Burke co-chairs the firm’s employment practice group and regularly advises U.S., international, and multinational employers on employee management issues and international HR compliance. Her practice includes advice pertaining to harassment, discrimination, leave, whistleblower, wage and hour, trade secret, and reduction-in-force issues arising…

Lindsay Burke co-chairs the firm’s employment practice group and regularly advises U.S., international, and multinational employers on employee management issues and international HR compliance. Her practice includes advice pertaining to harassment, discrimination, leave, whistleblower, wage and hour, trade secret, and reduction-in-force issues arising under federal and state laws, and she frequently partners with white collar colleagues to conduct internal investigations of executive misconduct and workplace culture assessments in the wake of the #MeToo movement. Recently, Lindsay has provided critical advice and guidance to employers grappling with COVID-19-related employment issues.

Lindsay guides employers through the process of hiring and terminating employees and managing their performance, including the drafting and review of employment agreements, restrictive covenant agreements, separation agreements, performance plans, and key employee policies and handbooks. She provides practical advice against the backdrop of the web of state and federal employment laws, such as Title VII of the Civil Rights Act of 1964, the Americans with Disabilities Act, the Equal Pay Act, the Family and Medical Leave Act, the Fair Labor Standards Act, and the False Claims Act, with the objective of minimizing the risk of employee litigation. When litigation looms, Lindsay relies on her experience as an employment litigator to offer employers strategic advice and assistance in responding to demand letters and agency charges.

Lindsay works frequently with the firm’s privacy, employee benefits and executive compensation, corporate, government contracts, and cybersecurity practice groups to ensure that all potential employment issues are addressed in matters handled by these groups. She also regularly provides U.S. employment law training, support, and assistance to start-ups, non-profits, and foreign parent companies opening affiliates in the U.S.

Photo of John Graubert John Graubert

John Graubert has more than 30 years of experience in a wide range of complex antitrust and consumer law matters. John came to the firm after serving for ten years as Principal Deputy General Counsel of the Federal Trade Commission. John is co-chair…

John Graubert has more than 30 years of experience in a wide range of complex antitrust and consumer law matters. John came to the firm after serving for ten years as Principal Deputy General Counsel of the Federal Trade Commission. John is co-chair of the firm’s Advertising and Consumer Protection practice group, an Adjunct Professor at the Georgetown University Law Center, and a vice-chair of the Federal Civil Enforcement Committee of the ABA Antitrust Section.

From 1998-2008, John served as Principal Deputy General Counsel (including several stints as Acting General Counsel) at the Federal Trade Commission. In that position John managed all litigation, legal counsel, policy studies, and administrative functions within the Office of General Counsel. He also advised the Commission and agency staff on antitrust and consumer protection matters and administrative law. He was involved in dozens of litigated matters for the Commission, including FTC v. Swedish Match, et al. (D.D.C. 2000) and FTC v. Schering-Plough, et al. (11th Cir. 2005), and received the A. Leon Higginbotham Award and the Award for Distinguished Service.

Photo of Stacey Grigsby Stacey Grigsby

As a former senior White House and Department of Justice Official, Stacey Grigsby combines high-level government experience with an understanding of corporate challenges to represent clients in significant litigation and sensitive investigations. Stacey recently rejoined the firm after serving as Deputy Counsel to…

As a former senior White House and Department of Justice Official, Stacey Grigsby combines high-level government experience with an understanding of corporate challenges to represent clients in significant litigation and sensitive investigations. Stacey recently rejoined the firm after serving as Deputy Counsel to President Biden. In the White House Counsel’s Office, Stacey advised the President and senior White House officials on a range of civil rights issues, worked closely with senior DOJ officials and Cabinet agency general counsel, and led interagency consideration of legal issues related to high-profile litigation, legislation, and regulations.

Stacey is a nationally recognized litigator, who has served as a principal lawyer in cases before numerous courts, including presenting ten oral arguments before the U.S. Court of Appeals. She also represents clients in matters involving pre- and post-award bid protests, government takings, contract disputes and claims, and investigations of alleged misconduct and fraud. Stacey also regularly litigates matters arising under: the Contract Disputes Act (CDA), the False Claims Act (FCA), the Tucker Act, and state unfair competition laws.

As co-chair of Covington’s Government Litigation practice, Stacey represents clients across numerous industries in a range of federal and state government-facing litigation proceedings. Stacey draws upon her recent role as a senior litigation strategist within the government and deep experience handling litigation in private practice, to represent clients in government litigation matters.

Stacey is also a senior member of the firm’s Institutional Culture and Social Responsibility Practice, serving our clients facing increasing scrutiny from internal and external stakeholders related to their workplace cultures and commitment to promoting gender and racial equity. Stacey is an integral resource for our clients in this space, given her unique experience at the center of government policy and decision-making on civil rights and related issues of diversity, equity, and inclusion. She was central to formulating the Administration’s strategy on reproductive rights in the wake of the Dobbs decision and its response to the Supreme Court’s Students for Fair Admissions decision on affirmative action in higher education.

Earlier in her career, Stacey served for eight years at the U.S. Department of Justice, as a trial attorney, senior trial attorney, and later as Counsel to the Associate Attorney General. As Counsel to the Associate AG, she advised on a diverse set of department-wide and interagency issues, ranging from civil litigation to proposed regulations. She assisted in negotiations to resolve a number of civil fraud investigations, resulting in historic settlements.

Photo of Terrell McSweeny Terrell McSweeny

Terrell McSweeny, former Commissioner of the Federal Trade Commission (FTC), has held senior appointments in the White House, Department of Justice (DOJ), and the U.S. Senate. At the FTC and DOJ Antitrust Division, she played key roles on significant antitrust and consumer protection…

Terrell McSweeny, former Commissioner of the Federal Trade Commission (FTC), has held senior appointments in the White House, Department of Justice (DOJ), and the U.S. Senate. At the FTC and DOJ Antitrust Division, she played key roles on significant antitrust and consumer protection enforcement matters. She brings to bear deep experience with regulations governing mergers and non-criminal, anti-competitive conduct, as well as issues relating to cybersecurity and privacy facing high-tech, financial, health care, pharmaceutical, automotive, media, and other industries. Terrell is internationally recognized for her work at the intersection of law and policy with cutting edge technologies including Artificial intelligence (“AI”), Digital Health, Fintech, and the Internet of Things (“IoT”). Clients benefit considerably from her extensive relationships with other enforcement agencies around the world.

Prior to joining the Commission, Terrell served as Chief Counsel for Competition Policy and Intergovernmental Relations for the U.S. Department of Justice, Antitrust Division. She joined the Antitrust Division after serving as Deputy Assistant to the President and Domestic Policy Advisor to the Vice President from January 2009 until February 2012, advising President Obama and Vice President Biden on policy in a variety of areas.

Terrell’s government service also includes her work as Senator Joe Biden’s Deputy Chief of Staff and Policy Director in the U.S. Senate, where she managed domestic and economic policy development and legislative initiatives, and as Counsel on the Senate Judiciary Committee, where she worked on issues such as criminal justice, innovation, women’s rights, domestic violence, judicial nominations, immigration, and civil rights.

Photo of Ryan Quillian Ryan Quillian

Ryan Quillian, former Deputy Assistant Director of the Technology Enforcement Division at the U.S. Federal Trade Commission (FTC), advises clients on the full range of civil antitrust issues, including conduct and merger investigations, civil litigation, and counseling and compliance.

Ryan joined Covington after…

Ryan Quillian, former Deputy Assistant Director of the Technology Enforcement Division at the U.S. Federal Trade Commission (FTC), advises clients on the full range of civil antitrust issues, including conduct and merger investigations, civil litigation, and counseling and compliance.

Ryan joined Covington after eight years of public service with the FTC, where he worked on antitrust investigations in a variety of industries, including technology, pharmaceutical and life sciences, retail, distribution, consumer goods, and healthcare. In addition to his investigation experience, Ryan also developed strong relationships with staff throughout the agency, routinely interacted with agency leadership, communicated directly with foreign competition agencies, and provided technical assistance on proposed legislation.

As a manager of the FTC’s Technology Enforcement Division, Ryan supervised complex investigations into potentially anticompetitive mergers and conduct involving technology companies. Prior to joining the Technology Enforcement Division, Ryan served as Counsel to the Director of the Bureau of Competition, Attorney Advisor to Commissioner Noah Joshua Phillips, Acting Deputy Assistant Director of the Mergers IV Division, and a staff attorney in the Mergers IV Division.

Photo of Evan Parness Evan Parness

Evan Parness has a full-service labor and employment practice that includes litigating cutting-edge issues at the trial and appellate levels, negotiating employment aspects of complex M&A deals and other business transactions, and counseling global employers on compliance with national, state, and local employment…

Evan Parness has a full-service labor and employment practice that includes litigating cutting-edge issues at the trial and appellate levels, negotiating employment aspects of complex M&A deals and other business transactions, and counseling global employers on compliance with national, state, and local employment laws and regulations.
Evan represents employers and senior executives in non-compete, harassment, discrimination, retaliation, ERISA, and business tort litigation in state and federal courts, administrative agencies, and alternative dispute resolution bodies. He has secured significant trial and appellate victories for clients, including complete dismissals of discrimination and retaliation lawsuits, successful verdicts following trial, and injunctive relief on behalf of clients enforcing restrictive covenants.

Evan also counsels established and emerging companies on compliance with federal, state, and local employment laws and regulations, and litigation avoidance measures in connection with all aspects of workplace employment issues. He conducts sensitive internal investigations of alleged discrimination and harassment, and assists employers in shaping workplace policies to comply with law and promote a productive working environment.

Evan advises leading companies on the labor and employment aspects of significant business transactions and acquisitions. He negotiates employment-related provisions in business transaction documents and oversees due diligence of a potential target’s employment practices. He also counsels clients on executive employment and restrictive covenants agreements.

Chambers USA notes “Evan is an exceptional and talented lawyer. He possesses a deep understanding of the law and an unwavering commitment to his clients. He has a keen eye for detail and can dissect complex legal issues with remarkable efficiency. His thorough and methodical approach to each case ensures that no stone is left unturned, providing his clients with the best possible legal representation.”

The Legal 500 US notes that clients have commented that “Evan Parness is an amazing attorney. Always attentive and will take instructions outside of business hours, he is always there when we need him and looks for the best outcome for clients.”

Photo of Christen Sewell Christen Sewell

Christen Sewell counsels private and public companies and executives on all aspects of employee benefits and executive compensation.

Christen has a particular focus on benefits issues for start-ups and emerging growth companies, including:

  • Advising on the design, compliance, and administration of stock options

Christen Sewell counsels private and public companies and executives on all aspects of employee benefits and executive compensation.

Christen has a particular focus on benefits issues for start-ups and emerging growth companies, including:

  • Advising on the design, compliance, and administration of stock options and equity-based plans and arrangements.
  • Drafting and negotiating executive compensation arrangements, including, employment, retention, change in control, and separation agreements.

Christen also advises clients on:

  • Tax-qualified retirement plans
  • Health and welfare plans
  • Non-qualified deferred compensation arrangements
  • Bonus and incentive plans
  • Corporate transactions (M&A, joint ventures, financings, spin-offs, public offerings, SPACs)

Christen’s expertise covers:

  • Code Section 409A deferred compensation rules
  • Tax rules governing equity compensation
  • Golden parachute rules under Code Section 280G
  • ERISA
  • COBRA
  • PPACA
  • GINA
  • HIPAA
Photo of Carolyn Rashby Carolyn Rashby

Carolyn Rashby provides business-focused advice and counsel to companies navigating the constantly evolving and overlapping maze of federal, state, and local employment requirements. Carolyn’s approach is preventive, while recognizing the need to set clients up for the best possible defense should disputes arise.…

Carolyn Rashby provides business-focused advice and counsel to companies navigating the constantly evolving and overlapping maze of federal, state, and local employment requirements. Carolyn’s approach is preventive, while recognizing the need to set clients up for the best possible defense should disputes arise.

As a senior member of Covington’s Institutional Culture and Social Responsibility Practice Group, Carolyn has co-led significant investigations into workplace culture, DEI issues, and reports of sexual misconduct and workplace harassment.

As an employment lawyer with over two decades of experience, Carolyn focuses on a wide range of compliance and regulatory matters for employers, including:

  • Conducting audits regarding employee classification and pay equity
  • Advising on employment issues arising in corporate transactions
  • Strategic counseling on a wide range of issues including discrimination and harassment, wages and hours, worker classification, workplace accommodations and leave management, performance management and termination decisions, workplace violence, employment agreements, trade secrets, restrictive covenants, employee handbooks, and personnel policies
  • Drafting employment contracts and offer letters, separation agreements, NDAs, and other employment agreements
  • Advising on employee privacy matters, including under the California Consumer Privacy Act
  • Providing guidance on use of AI in the workplace and development of related policies
  • Leading anti-harassment and other workplace-related trainings, for employees, executives, and boards

Carolyn also works frequently with the firm’s white collar, privacy, employee benefits and executive compensation, corporate, government contracts, and cybersecurity practice groups to ensure that all potential employment issues are addressed in matters handled by these groups.

Photo of Lauren Willard Lauren Willard

Lauren Willard is a partner in Covington’s Antitrust/Competition and Appellate practices. Drawing on her deep substantive antitrust experience in both the government and private practice, Lauren represents and advises clients on a variety of antitrust matters. She defends clients in complex civil litigation…

Lauren Willard is a partner in Covington’s Antitrust/Competition and Appellate practices. Drawing on her deep substantive antitrust experience in both the government and private practice, Lauren represents and advises clients on a variety of antitrust matters. She defends clients in complex civil litigation and class actions, counsels on mergers and acquisitions, and represents clients before federal regulators. She also represents clients in appellate matters before the U.S. Supreme Court and federal courts of appeals.

Lauren rejoined Covington after spending four years at the U.S. Department of Justice (DOJ) working on antitrust and appellate matters, with a particular focus on competition in the digital economy. She served as a Counsel to the Assistant Attorney General of the Antitrust Division, where she worked on a range of merger and conduct matters and served as the Front Office liaison to the International and Appellate sections. She also drafted several amicus briefs and statements of interest and coordinated with the Office of the Solicitor General and Civil Division on appellate matters involving antitrust issues. Lauren accepted a career detail to the Office of the Attorney General to lead the DOJ’s review of market-leading online platforms. In that role, she advised the Attorney General on the application of antitrust to technology platforms, managed antitrust investigations related to technology platforms, and coordinated with the States Attorneys General. Lauren also chaired the DOJ’s working group on Section 230 of the Communications Decency Act and drafted legislation that was cleared through the interagency process and presented to Congress. Following her detail, Lauren returned to the Antitrust Division, where she worked directly on the DOJ’s trial team in US v. Google, one of the biggest government antitrust monopolization litigations in the past 20 years.

After graduating from the University Virginia School of Law, she served as a law clerk to Justice Anthony Kennedy of the U.S. Supreme Court and Chief Judge Alex Kozinski of the Court of Appeals for the Ninth Circuit.

Photo of Jenna Wallace Jenna Wallace

Jenna Wallace advises clients on all aspects of employee benefits and executive compensation. Her practice covers a broad spectrum of plans and arrangements, such as:

  • tax-qualified retirement plans, including traditional and hybrid pension plans, 401(k) plans, and profit-sharing plans;
  • health and welfare plans,

Jenna Wallace advises clients on all aspects of employee benefits and executive compensation. Her practice covers a broad spectrum of plans and arrangements, such as:

  • tax-qualified retirement plans, including traditional and hybrid pension plans, 401(k) plans, and profit-sharing plans;
  • health and welfare plans, including medical, disability, cafeteria and severance plans;
  • equity-based compensation, including stock options, restricted stock, profits interests and phantom equity;
  • nonqualified deferred compensation plans;
  • employment, consulting and restrictive covenant agreements; and
  • international employment arrangements.

Jenna guides employers with respect to the administration of 401(k) and pension plans (including standards applicable to the investment of ERISA-covered assets), the requirements of the Patient Protection and Affordable Care Act, Section 409A of the Internal Revenue Code, management employment and equity arrangements, employee separations and international employment issues. Jenna also advises public and private companies in connection with mergers, acquisitions, and other corporate transactions, and advises private funds regarding investments by public and private employee benefit plans.

Jenna has an active pro bono practice, with a focus on assisting organizations working in Africa and other parts of the developing world.

Photo of Alezeh Rauf Alezeh Rauf

Alezeh Rauf is an associate in the firm’s Washington, DC office. She is a member of the Antitrust/Competition Practice Group.