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On October 4, 2024, Plaintiff ATS Tree Services, LLC (“ATS”) voluntarily dismissed its claims against the FTC challenging the agency’s Non-Compete Rule. See ATS Tree Services, LLC v. Fed. Trade Comm’n, et al., No. 2:24-CV-01743-KBH (E.D. Pa. July 23, 2024). The dismissal ends the case before a decision on the merits, preventing the FTC from obtaining a favorable ruling on the Non-Compete Rule in the Third Circuit.

One day prior, on October 3, 2024, the Eastern District of Pennsylvania denied ATS’ motion to stay the proceedings. ATS argued that a stay was warranted because the nationwide injunction issued by the Ryan Court left no Rule in place to litigate. ATS sought a stay until the deadline for the FTC to appeal the Ryan judgment passed, or until the Fifth Circuit issued a decision if an appeal was filed. The FTC opposed ATS’ Motion, arguing that the Ryan Court’s non-binding judgment did not prevent the Eastern District of Pennsylvania from adjudicating the issues before it and issuing its own ruling.

The Eastern District of Pennsylvania reasoned that both can be true. The Court acknowledged that the Ryan ruling meant there was no Rule left to litigate at present. However, the Court also recognized that the potential for an appeal of the Ryan judgment created uncertainty about the Rule’s future, stating, “[t]he fact that the Rule is currently enjoined does not mean that it is forever gone.” The Court determined it still had a responsibility to decide the issues before it and denied the motion to stay.

The Court then clarified ATS’ options: “[i]f ATS is satisfied with the outcome in Ryan and believes it sufficiently addresses their claims, it is not obligated to continue litigating this case. However, if it does not wish to withdraw, then this Court will move the case forward as is its duty.” ATS responded by dismissing its claims without prejudice less than a day after the Court denied the stay. The matter now shifts to the Fifth Circuit, where the Northern District of Texas issued a judgment on the merits setting aside the Rule pending a possible appeal, and the Eleventh Circuit, where the FTC has appealed the Middle District of Florida’s injunction blocking enforcement of the Rule against that case’s plaintiff.

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We are honored to be named “Highly Recommended” in World Intellectual Property Review’s inaugural 2024 Global Trade Secrets Rankings, which spotlight top firms and practitioners worldwide.

These accolades highlight Seyfarth’s continued excellence in protecting clients’ valuable intellectual property on a global scale. For the full list and individual accolades, click here.

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Just over a month ago, employers throughout the United States breathed a sigh of relief after Judge Ada Brown in the Northern District of Texas issued a summary judgment ruling in the Ryan v. FTC litigation setting aside the FTC’s rule banning the vast majority of non-competes (the “Rule”). In that decision, Judge Brown reasoned—just as she had in her order on the plaintiffs’ motion to stay and enjoin the Rule—that the FTC violated the APA because it “exceeded its statutory authority in implementing the Rule,” and the Rule is “arbitrary and capricious.”

While Judge Brown’s reasoning on summary judgment mirrored her earlier decision, there was one significant distinction: unlike the injunction, which only applied to the specific plaintiffs in the Ryan litigation, Judge Brown’s summary judgment decision had “nationwide effect” that is not “party restricted” and thus “affects persons in all judicial districts equally,” pursuant to Fifth Circuit precedent. As a result, employers were not required to comply with the Rule’s September 4 deadline to advise employees that their non-competes were unlawful and unenforceable.

Many wondered whether the FTC would appeal Judge Brown’s decision to the Fifth Circuit. Perhaps unsurprisingly, given the Fifth Circuit’s notorious antagonism towards agency action such as the FTC’s, no appeal has been filed (although the deadline to do so is not until October 21). But today, the FTC appealed a separate court decision: the Middle District of Florida’s August 15 decision granting a stay and enjoining the FTC’s enforcement of the Rule against the plaintiff in that case, Properties of the Villages (“POV”), which used slightly different reasoning to reach essentially the same result as the Ryan court’s decision to preliminarily enjoin the Rule. Presumably, the FTC sees the Eleventh Circuit as at least marginally more favorable to its cause than the Fifth Circuit, but it is unclear how this appeal will impact the Ryan court’s summary judgment ruling, which as noted above, is effective nationwide. Arguably, this appeal does not impact that decision at all, and one could argue that if the FTC had wanted to avoid the “nationwide effect” of Judge Brown’s ruling, it should have appealed that decision first and foremost, even if it faced a challenging audience in the Fifth Circuit.

Meanwhile, to complicate matters further, in the Eastern District of Pennsylvania, Judge Kelley Brisbon Hodge had, weeks prior to the Ryan summary judgment decision, come to the opposite conclusion—i.e. that the FTC had the authority to implement the Rule—when she denied plaintiff ATS Tree Services’ motion to stay and enjoin the Rule. That case remains pending, with summary judgment briefing due in the coming months. On September 6, 2024, ATS Tree Services sought to stay the litigation in light of the Ryan court ruling setting aside the Rule. The FTC has opposed a stay, noting its disagreement with the scope of the Ryan court ruling (in addition to its reasoning, of course). It is not clear when those motions will be decided, or whether the FTC’s latest move in appealing the POV litigation will impact Judge Hodge’s decision on the motion to stay. Nor is it clear why ATS Tree Services did not simply dismiss its case following the Ryan court’s summary judgment decision, as it could have relied upon the nationwide effect of that decision.

Regardless, the legality of the Rule will be appealed in one forum or another (if not in multiple fora), and it will remain important as always to comply with relevant state law while this issue works its way through the courts.

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Tuesday, October 1, 2024
1:00 p.m. to 2:00 p.m. Eastern
12:00 p.m. to 1:00 p.m. Central
11:00 a.m. to 12:00 p.m. Mountain
10:00 a.m. to 11:00 a.m. Pacific

For more information and to register, click here.

About the Program

In a world where corporate espionage and data breaches are increasingly common, protecting your company’s intellectual property is more vital than ever. Recent developments surrounding the FTC’s Non-Compete Ban, currently stalled in litigation, highlight the need for proactive measures. This webinar will help you navigate these regulatory shifts and strengthen your IP protection strategies.

Join Lauren Leipold, Eddy Salcedo, and James Yu for the next installments of Seyfarth Shaw’s 2024 Trade Secrets Webinar Series. This webinar offers crucial insights into enhancing your IP defenses and preparing for future regulatory changes.

Key Discussion Points:

  • Identifying and Securing IP Protection: Learn about the differences between trademark, trade dress, copyright, patent, and trade secret protection, and how to determine which laws will best protect your company’s key intangible assets.
  • Effective Secrecy Protections: Where federal registration is not feasible, understand how to use employment agreements and non-compete clauses to protect and enforce trade secrets.
  • Hiring and Termination Protocols: Learn best practices for managing hiring, terminations, and exit interviews to prevent IP theft and protect your assets.
  • Comprehensive Protection Plan: Develop a holistic IP protection strategy that integrates legal, technical, and operational measures.
  • Managing Computer-Stored Data: Gain strategies for securing data and responding to breaches, focusing on protecting sensitive information.

Who Should Attend: This webinar is ideal for in-house counsel, HR professionals, compliance officers, and business leaders responsible for IP protection. Equip yourself with the knowledge to safeguard your company’s most valuable assets.

Speakers

Lauren Leipold, Partner, Seyfarth Shaw LLP

Eddy Salcedo, Senior Counsel, Seyfarth Shaw LLP

James Yu, Senior Counsel, Seyfarth Shaw LLP

For more information and to register, click here.

If you have any questions, please contact Sadie Jay at sjay@seyfarth.com and reference this event.

To comply with State CLE Requirements, CLE forms requesting credit in IL or CA must be received before the end of the month in which the program took place. Credit will not be issued for forms received after such date. For all other jurisdictions forms must be submitted within 10 business days of the program taking place or we will not be able to process the request.

Our live programming is accredited for CLE in CA, IL, and NY (for both newly admitted and experienced).  Credit will be applied as requested, but cannot be guaranteed for TX, NJ, GA, NC and WA. The following jurisdictions may accept reciprocal credit with our accredited states, and individuals can use the certificate they receive to gain CLE credit therein: AZ, AR, CT, HI and ME. For all other jurisdictions, a general certificate of attendance and the necessary materials will be issued that can be used for self-application. CLE decisions are made by each local board, and can take up to 12 weeks to process. If you have questions about jurisdictions, please email CLE@seyfarth.com.

Please note that programming under 60 minutes of CLE content is not eligible for credit in GA. programs that are not open to the public are not eligible for credit in NC.

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Jimmy Buffett once eloquently said that “without geography, you’re nowhere.”  But how does that insight apply to restrictive covenants that lack explicit geographic limitations in Georgia? While Jimmy never got to find out, we now have some much-needed clarity from the Georgia Supreme Court.

For many years, most Georgia litigants, individuals, and businesses operated under the assumption that some restrictive covenants did not need to contain an explicitly defined geographic limitation to be deemed “reasonable” in terms of “geographic area” because O.C.G.A. § 13-8-53(a) of the Georgia Restrictive Covenants Act (“GRCA”) did not include such a requirement. That longstanding belief was called into question last year, however, when the Georgia Business Court ruled that North American Senior Benefits, LLC (“NASB”) could not enforce an employee non-solicit covenant because the provision lacked an explicit geographic limitation.  On appeal, the Georgia Court of Appeals affirmed the lower court’s ruling. In so doing, it primarily relied upon and adopted the holding in CarpetCare Multiservices v. Carle, 347 Ga. App. 497, 819 S.E.2d 894 (2018), which voided a customer non-solicit because it did not include an explicit geographic limitation.

NASB appealed the Court of Appeals’ decision to the Georgia Supreme Court. Technically, the question certified by the Supreme Court was limited to whether an employee non-recruit must include an explicit geographic area to be “reasonable” under the GRCA.

Last week, the Georgia Supreme Court unanimously reversed the Court of Appeals’ opinion in North American Senior Benefits, LLC v. Wimmer et al., No. S23G1146 (Ga. 2024), holding that an employee non-solicit covenant does not need to contain an explicit geographic limitation to be considered “reasonable” in terms of “geographic area,” as required by the GRCA.  In its opinion, the Georgia Supreme Court also rejected the prior CarpetCare ruling, noting that the “plain text” of O.C.G.A. § 13-8-53(a) does not require a restrictive covenant to contain a precise, defined “geographic area.” Instead, the statute only mandates that the applicable “geographic area” (be it expressly defined or merely implied) be “reasonable.” Based on this analysis, the Supreme Court also held that the Statewide Business Court “must assess whether the provision’s geographic scope is reasonable in light of the totality of the circumstances including, but not limited to, the total geographic area encompassed by the provision, the business interests justifying the restrictive covenant, the nature of the business involved, and the time and scope limitations of the covenant.”

Notably, the Georgia Supreme Court’s opinion in Wimmer contains additional analysis and direction beyond merely how Georgia courts should rule on geographic limitations contained in an employee non-recruit provision. The Georgia Supreme Court also addressed O.C.G.A. § 13-8-53(c), which concerns situations “whenever a description” of a “geographic area” is required, and held that despite this subsection, “there are times when [a defined geographic area] is not required” opening up its holding to clauses past just employee non-solicits.

Jimmy Buffett also famously said, “indecision may or may not be my problem.” Well, with this Georgia Supreme Court ruling, we can now move forward with some much-needed certainty on an important issue for many employees and employers (maybe even sailors and Parrot Heads?).

By Michael Tamvakologos & Ian Neil SC

This post has been cross-posted from Seyfarth’s Workplace Law & Strategy blog, and discusses Australian law on non-competes.

It seems like death by a thousand cuts. In August last year, Federal Treasurer Jim Chalmers announced a Competition Review to examine competition laws, policies and institutions to focus on reforms that would increase productivity, reduce the cost of living and/or lift wages. Non-compete clauses would be part of this two-year process.

Since then, we’ve had a Government Employment White Paper Roadmap reiterate its intention to investigate non-compete clauses (September 2023) and a Competition Review to discuss non-compete and related clauses (October 2023).

The push for change has gathered momentum this year. The ABS released an employer survey that found 22% of workers were subject to a non-compete clause. Then, in March, Dr. Iain Ross (former Fair Work Commission President) authored an ANU Crawford School of Government paper that concluded that the existing law and practice regarding non-competes was “manifestly unfair and contrary to the public interest”, to be closely followed by a government issues paper, titled Non-competes and other restraints: understanding the impacts on jobs, business and productivity, in April 2024.

These papers and reviews have gone hand in glove with ministerial and union rhetoric that would strongly suggest that the die has been cast – non-competes will be overhauled or even abolished. Certainly, there has been little if any argument to the contrary.

For example, the Assistant Minister for Competition, Andrew Leigh, told the McKell Institute that non-compete clauses were affecting a diverse range of employees – from break-dancing instructors to disability support workers and boilermakers. He added that international evidence suggested they harmed job mobility, innovation and wages growth.

For their part, unions want a total ban on non-competes, with ACTU assistant secretary Joseph Mitchell saying recently that the spread of non-competes had gone “completely haywire” and the Government should take “bold action” on the issue.

In essence, they advance four arguments for change, none of which we believe provide compelling evidence for root-and-branch change. They also cite what’s happening with non-competes in the U.S. (of which more later).

The first argument is that the courts generally treat a former employee’s interests as irrelevant when determining the validity and enforcement of a non-compete clause, with the consequence being most are upheld. The second, and related, assertion is that employers have ready access to Court injunctions because they only need to show a prima facie argument that the non-compete is valid, with a review of the relevant cases suggesting that the “balance of convenience” test is always weighed in the employers’ favour.

The third argument asserts that non-compete provisions have become more widespread, covering many low-income employees who will observe the restraint whether it is valid or not because they lack access to legal advice or the outcome is uncertain.

Finally, there’s the economic argument that non-competes prevent employees moving jobs for wage rises, and stifle innovation and competition by preventing the flow of ideas between firms. In essence, it portrays a system heavily stacked against individual workers and labour mobility.

Those on the reform bandwagon also cite what’s happened in the U.S. where the Federal Trade Commission (similar to the Australian ACCC) has voted to ban new non-competes and limit the enforceability of existing non-competes. What’s only mentioned in the fine print is that the decision was a controversial 3-2 and is being legally challenged. [Editor’s note: In the US, the FTC’s ban was recently set aside on a nationwide basis; see more here.]

When dissected, just how compelling are these arguments? In our view, not very. In our White Paper (available here upon request), we contend that the picture presented is either inaccurate or an oversimplification while disregarding the benefits of restraint provisions and failing to appreciate how this area of law operates in practice.

First, it is not accurate to assert that, when determining the validity of or enforcing a non-compete clause, the employee’s interests are irrelevant and only the employer’s position counts. In fact, the well-established legal test is whether the non-compete is reasonable having regard to the interests of both employer and employee, and it’s not difficult to find judicial decisions, recent and historical, that contradict these assertions.

Second, most non-competes are not upheld in Court. Our evidence? The one Australian study to examine the enforceability of restraints found that 54% are not enforced, and outside of NSW (where there is specific legislation making restraints easier to enforce) restraints (including non-competes and other restraints such as non-solicitation clauses) are only enforced 33% of the time – hardly conclusive evidence.

Third, the reasonableness test is criticised for causing uncertainty and confusion, particularly in circumstances where a cascade clause is used. Although this assertion has some validity, it’s overstated. We see the real problem as imprecise drafting and the use of restraints to cover employees who should not be subject to them and who may feel obliged to observe them regardless. Provided there is a sensible and genuine attempt to fashion a cascading clause within a set of narrow circumstances, and to use these instruments appropriately, we think there is a place for them.

Fourth, it is accurate to say that the interests protected by restraints have expanded, but only in one category – an employer’s legitimate interest to maintain a stable, trained workforce. Here the solution could be support for a non-solicitation restraint for a reasonable period within a defined scope and geography. Such provisions have existed since at least the early 1990s and recognise the significant investment that can go into achieving a stable, trained workforce, as well as the confidential information and customer connections an employee may hold.

Finally, the net economic effect of non-competes is debatable and arguably positive rather than negative. One recent U.S. academic paper noted that “contrary to the direction of recent scholarship, popular commentary, and policy activity (sound familiar?), there is little certainty concerning the net efficiency effects of non-competes in general and reasonable grounds to believe they have a net positive effect in certain innovation environments.”

This issue is the zeitgeist of the moment. Suddenly, non-competes are hindering job mobility and wage rises and are a handbrake on productivity, while the tangible benefits of non-compete provisions and other restraints (we will address these in our second article) are ignored.

How else do we explain why the common law relating to non-competes has not been altered by statute except on one occasion where NSW legislation made restraints easier to enforce.

We suggest a carefully balanced policy approach will consider all the research concerning the issues identified. It will recognise that there are benefits to non-competes and other restraints; to business, employees and the economy, together with some disadvantages that must be properly assessed to identify what intervention, if any, is necessary. On this issue – and certainly on the available evidence – the Government should hasten slowly.

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Once again surprising the country by acting ten days before her own self-appointed deadline, a federal judge in the United States District Court for the Northern District of Texas issued a ruling on August 20 in the Ryan v. FTC case setting aside the FTC Rule banning non-competes, and held (quoting Fifth Circuit precedent) that the ruling had “nationwide effect” that is “not party restricted” and “affects persons in all judicial districts equally.” This will undoubtedly elicit an immediate appeal from the FTC.

The Court’s reasoning is almost word-for-word identical to its Order staying the FTC Rule on July 3, 2024 (which we analyzed here). The Court once again limited its ruling to conclude that the FTC violated the APA because “[1] the FTC exceeded its statutory authority in implementing the Rule, and [2] the Rule is arbitrary and capricious.”

Regarding the statutory authority, the Court once again ruled that “the text, structure, and history of the FTC Act reveal that the FTC lacks substantive rulemaking authority with respect to unfair methods of competition under Section 6(g),” which is the section of the FTC Act that the FTC relied on for promulgating the rule. While the Court concluded “the FTC has some authority to promulgate rules to preclude unfair methods of competition,” it nonetheless held that Section 6(g) is “a ‘housekeeping statute,’ authorizing what the APA terms ‘rules of agency organization procedure or practice’ as opposed to ‘substantive rules.’” The Court also agreed that “the lack of a statutory penalty for violating rules promulgated under Section 6(g) demonstrates its lack of substantive rulemaking power.”  Finally, the Court found that “viewing the statute as a whole, the location of the alleged substantive rulemaking authority is suspect”, as it would mean “Congress did not choose to place such substantial power in a primary, independent place.”

The Court also found once again that the Rule is “arbitrary and capricious because it is unreasonably overbroad without a reasonable explanation. It imposes 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.” Specifically, the Court held that the Rule: (1) inadequately relies on a handful of studies which compare inapposite state approaches, and, (2) is broader than any previously enacted state rule. In addition, Court held that the FTC failed to sufficiently address less-disruptive alternatives to the Rule or whether reliance interests may outweigh its policy concerns. The Court also held the FTC failed to consider the pro-competitive justifications for non-competes.

The Court once again did not address arguments about whether the Rule is invalid because it represents a “Major Question” or runs afoul of the “Non-Delegation Doctrine,” two constitutional rules of interpretation that the opponents of the Rule raised in their briefing. There is also no further discussion of retroactivity or any other subsidiary argument raised by the parties. 

The primary change from the preliminary stay ruling in the Court’s Order is the final relief. Because the parties are at summary judgment, the Court ruled that it was obligated to “set aside” the unlawful Rule:

The text of the APA means what it says.” [Loper Bright Enters. v. Raimondo, 144 S. Ct. 2244, 2262 (2024)]. Having concluded that (i) the FTC promulgated the Non-Compete Rule in excess of its statutory authority, and (ii) the Rule is arbitrary and capricious, the Court must “hold unlawful” and “set aside” the FTC’s Rule as required under § 706(2). As to the FTC’s argument that relief should be limited to the named Plaintiffs—the APA does not contemplate party-specific relief. See generally 5 U.S.C. § 706(2).

“As [the Fifth Circuit] put it in a couple of recent cases, setting aside agency action under § 706 has ‘nationwide effect,’ is ‘not party-restricted,’ and ‘affects persons in all judicial districts equally.’”

Braidwood Mgmt., Inc. v. Becerra, 104 F.4th 930, 951 (5th Cir. 2024) (internal citations omitted). Thus, the Court hereby holds unlawful and sets aside the Rule. See 16 C.F.R. § 910.1–.6.14 The Rule shall not be enforced or otherwise take effect on its effective date of September 4, 2024, or thereafter. See 16 C.F.R. § 910.1–.6.

The Court’s language that the Rule “shall not be enforced or otherwise takes effect” provides further clarity for businesses wondering what they should do on September 4 and likely protects businesses and employees from an aggressive FTC that might consider action not in full compliance with the Order.

Even as this case comes to a close at the district court level (and will likely go on appeal), two other district court cases challenging the FTC Rule remain. As previously reported, the court in ATS Trees v. FTC in the Eastern District of Pennsylvania has upheld the FTC’s authority to issue the Rule but did so only at the preliminary injunction stage. Meanwhile, the court in Properties of the Villages v. FTC in the Middle District of Florida held the FTC lacked the authority to promulgate the Rule, finding the FTC violated the Major Questions doctrine, as discussed here.

Arguably this district court’s ruling in Ryan v. FTC with its “nationwide effect” should prevent any further conflicting rulings, at least until the Fifth Circuit weighs in. Whether the other district courts honor this ruling, however, remains to be seen. 

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This just in: Judge Ada Brown ruled today on the parties’ dueling summary judgment motions – 10 days before her self-imposed deadline to do so – in Ryan LLC v. FTC. Judge Brown granted the plaintiffs’ motion for summary judgment while denying the FTC’s motion, determining that the FTC’s rule banning non-competes is an unlawful agency action and must be set aside. Specifically, she found that the FTC promulgated the rule in excess of its statutory authority, and that the rule is arbitrary and capricious. Most importantly, in responding to the FTC’s claim that relief should be limited to the plaintiffs in the litigation, the judge noted:

“[S]etting aside agency action under § 706 has ‘nationwide effect,’ is ‘not party-restricted,’ and ‘affects persons in all judicial districts equally.” (emphasis added)

More information and analysis to follow.

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As we recently reported, in its Final Rule banning most worker non-competes, the Federal Trade Commission (“FTC”) previously warned of its intent to vigorously enforce its non-compete ban wherever possible, which may include self-styled nonprofit and not-for-profit entities.  This warning threw most hospital systems in America, which are non-profit, into the chaos of unsettled expectations surrounding the current litigation over the Rule.

In a recently submitted brief to the Northern District of Texas for Ryan LLC v. FTC, the American Hospital Association (“AHA”) and the Federation of American Hospitals (“FAH”) (collectively, “Amici”) acknowledged this warning, while further emphasizing the distortions this rule will cause on the health care industry, as well as pointing out the key benefits to non-competes.

The Amici first highlighted the disproportionate impact of the Final Rule applying only to taxpaying hospitals given these hospitals compete directly with nonprofit hospitals for the same employees in the same market. Specifically, the Amici cited to previous data in the AHA comments to the Final Rule which indicates 78.8% of for profit hospitals are located in the same Hospital Referral Region (HRR) as one nonprofit hospital. The Amici further noted such disparate treatment “will produce an uneven playing field among hospitals” contrary to the Final Rule’s purported goal and will likely create “significant, unstudied, and anticompetition distortions” in the already-challenging workforce shortage experienced by America’s hospital systems. Specifically, the AHA comments to the Final Rule indicate the Final Rule’s application would decrease the supply of labor with respect to for profit hospitals, increase the price for such labor, and create market instability. The Amici also highlighted how the FTC’s intent to regulate “some portion” of nonprofit hospitals but, by its own admission, not all nonprofit hospitals further exasperates the issue of distortion by producing an even more uneven playing field between taxpaying and nonprofit hospitals which are purportedly subject to the Final Rule and those nonprofit hospitals which are not. Pertinently, by including the FTC’s intent to regulate nonprofit hospitals wherever possible in their distortion arguments, the Amici implicitly recognized the FTC’s warning as more than just an empty threat.

Even more alarming for nonprofit hospitals is the FTC’s emphasis in the Final Rule and elsewhere on case law where self-styled nonprofit and not-for-profit entities have lost their tax-exempt status. To be exempt under Section 501(c)(3) of the Internal Revenue Code, an organization must be both organized exclusively for one or more of the exempt purposes specified in that section and operated exclusively for such purposes. Tikar, Inc. v. Comm’r of Internal Revenue, 121 T.C.M. (CCH) 1408 (T.C. 2021). An organization loses its tax-exempt status if “more than an insubstantial part” of its activities are not in furtherance of an exempt purpose specified under Section 501(c)(3) of the Internal Revenue Code. Id. In conducting this test, courts have considered a host of situations as disqualifying a self-styled nonprofit or not-for-profit entities’ tax-exempt status, which deserve their own blog post.

The general nature of the test for determining an organization’s tax-exempt status under Section 501(c)(3) of the Internal Revenue Code and the breadth of situations where self-styled nonprofit or not-for-profit entities lost their tax-exempt status is a sobering reminder that such organizations, including nonprofit hospitals, may not in fact be beyond the FTC’s reach.

However, on a less ominous note, the Amici did raise some positives in their brief to the Northern District of Texas. Specifically, the Amici highlighted extensive empirical evidence from a physician-specific study in the AHA comments to the Final Rule regarding the benefits of non-competes. Indeed, the Amici noted non-competes increase: (1) competition and earnings for physicians; (2) the continuity and quality of patient care; (3) the accessibility of healthcare in rural communities; and (4) the efforts and investments made in medical training, innovation, and development overall. This empirical evidence directly combats the purely anecdotal and self-serving statements of alleged “exploitation and coercion” which purportedly results from non-competes as advanced by the FTC in its Final Rule.

This empirical evidence also highlights how an overbroad, sweeping, and one-size-fits-all approach like the Final Rule is not the remedy for “evening the playing field” given the benefits non-competes pose for certain jobs, industries, and/or markets. Indeed, state legislatures are better equipped at limiting non-competes in a narrowly tailored scope and many have already done so. Specifically, Texas law requires a physician non-compete to provide for a buy-out at a reasonable price to be enforceable. See Tex. Bus. & Com. Code § 15.50. Moreover, Pennsylvania’s governor recently signed a bill where health care practitioner non-competes will only be enforceable if (1) the non-compete lasts no more than one year; and (2) the health care practitioner voluntarily separates from the employer. As such, state legislatures are in a better position to regulate and enforce non-competes as they can better understand the individual needs of certain jobs, industries, and/or markets than the FTC’s Final Rule.

The Northern District of Texas will issue a final ruling on the merits of the challenge to the FTC’s Final Rule on or before August 30, 2024 prior to it taking effect—if it ultimately does take effect—on September 4, 2024. As previously reported, at least one other district court has denied relief to a plaintiff challenging the Final Rule, instead upholding the FTC’s authority to regulate restrictive covenants through is rulemaking powers.  More recently, however, another district court enjoined the application of the Final Rule to the challenging plaintiff, holding the Final Rule violated the Constitutional Major Questions doctrine.

Regardless of the next steps in this ever-changing legal maelstrom, nonprofit hospitals should work closely with legal counsel in examining their activities, affiliated entities, structure, and revenue to determine whether they are in fact safe from the FTC’s reach or need to become compliant with the restrictions posed in the Final Rule.

Yesterday, a third court weighed in on the FTC’s proposed ban on non-competes, set to go into effect on September 4, 2024. Judge Corrigan of the United States District Court for the Middle District of Florida granted the plaintiff Properties of the Villages, Inc.’s (“POV”) motion to stay the effective date of the rule and preliminarily enjoin its enforcement. Due to the looming effective date, the court opted to deliver its opinion orally in lieu of a written opinion.

Ultimately, the court found that POV has a substantial likelihood of success on the merits of its argument that the FTC’s final rule violates the major questions doctrine. The court stated that “… common sense, informed by constitutional structure, tells us that Congress normally intends to make major policy decisions itself, not leave those decisions to agencies.” (ECF 59 at PageID # 485.) Relying largely on the FTC’s own economic assessment of the rule, the court found that the “transfer of value from employers to employees, from some competitors to other competitors, from existing companies to new companies, and other ancillary effects, will have a huge economic impact.” (Id., #487.) Based on the economic impact, political significance, and “hugely consequential expansion of regulatory authority,” the court held that the rule presents a “major question as defined by the Supreme Court.” (Id., #488.)

Similar to the Ryan case pending in the Northern District of Texas, the ruling in the POV case is limited to just POV. That is because POV only sought relief for itself and not a nationwide injunction.

For those keeping score, it is now two courts to one finding against the FTC at the preliminary injunction stage (the Eastern District of Pennsylvania being the lone vote for the FTC). The future of the FTC’s rule is quickly coming to a head as Judge Brown’s decision on the merits in the Ryan, LLC v. FTC case is due by August 30. While Judge Brown declined to enter a nationwide injunction, Fifth Circuit precedent suggests that Judge Brown is likely to enter an order vacating the rule, which will apply universally.  Regardless of how Judge Brown rules or the relief entered, an appeal is almost certainly the next step.