Employment Law Update: Federal Agencies Suffer Setbacks as Courts Enjoin Non-Compete Ban and Reject Lifting Stay of New Sex Discrimination Rule
Date: August 22, 2024
In the first of these cases, Dept of Education v. Louisiana, 603 U.S. __ (2024), the Supreme Court issued a total injunction against the Department of Education in enforcement of new rules concerning the interpretation of Title IX of the Education Amendment Acts, a federal law that prohibits sex discrimination in any education program or activity receiving federal financial assistance. At issue was the broad definition of sex discrimination in the rule to include discrimination based on a student’s gender identity. Plaintiffs in Louisiana and Tennessee filed suit challenging the new definition as outside the scope of agency authority, and further claiming that the change, in the context of the similarly revised definition of hostile work environment, violated the First Amendment by “chilling or compelling speech including on issues of gender identity.”
The issue before the Supreme Court focused primarily on the breadth of the injunctions from the lower courts, which enjoined the entire rule, rather than just the disputed added language on gender identity. However, the majority concluded that the new definition of sex discrimination was so intertwined with and affected other provisions of the rule, that a total injunction was permissible.
The second blow to federal regulatory authority came on Wednesday, as a federal district court judge in the U.S. District Court for the Northern District of Texas issued a permanent injunction against the Federal Trade Commission’s near-total ban on non-compete agreements in the employment context.
The rule, which was slated to go into effect on September 4, 2024, would have made it unlawful for employers to include non-compete provisions in employment agreements and would have invalidated existing clauses for most workers currently subject to them.
The Texas Court decision is not the first court to limit the enforcement of the rule, but it is the first court to permanently enjoin the entire rule, preventing it from going into effect. In coming to its decision, the court found the FTC’s rule relied on limited empirical evidence of the harmful effects of non-competes and disregarded the fact that no state had enacted a ban as broad as that in the FTC rule. Applying the recent decision of Loper Bright Enterprises v. Raimondo, 144 S.Ct. 2244 (2024), which overruled the Chevron deference rule to agency rulemaking, the trial court concluded that the Rule was “based on inconsistent and flawed empirical evidence, fail[ed] to consider the positive benefits of non-compete agreements, and disregard[ed] the substantial body of evidence supporting these agreements." The court also determined that the FTC failed to adequately consider alternatives to its broad rule, and conducted no weighing of competing policy concerns.
Both decisions highlight the increasing role courts will play in limiting agency rule-making authority and the scope of their investigatory and enforcement authority, particularly in light of the Loper Bright decision, and increasing First Amendment challenges to discrimination laws. The Department of Education v. Louisiana decision in particular will likely impact current challenges to recent EEOC Harassment Guidance which likewise defines sex discrimination to include gender identity. It remains to be seen, how far the government agencies will pursue these cases, particularly given the mathematics of the Supreme Court.
Employers should not assume that these decisions necessarily end the risk of legal challenges on these issues. Non-competes remain a target of state legislatures and multiple states have taken action to significantly restrict the use of non-competes. Likewise, many state laws include gender identity in existing non-discrimination statutes, while some have specifically excluded the classification. Employers are well advised to seek legal advice and counsel on the best practices and strategies for navigating these issues and reducing litigation risks for their business.
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