As predicted, a Texas federal court issued a preliminary injunction preventing a Federal Trade Commission (“Commission” or “FTC”) rule banning most employee noncompetition agreements (the “Noncompete Rule”), from going into effect. However, the preliminary injunction applies only to the plaintiffs before that court. The court has promised a ruling on the merits by August 30, 2024, six days before the Noncompete Rule is scheduled to go into effect on September 4, 2024.
The ruling is the first of what may be many enjoining the Noncompete Rule, including one ruling that may impose a nation-wide injunction in the next few weeks.
The Commission’s Noncompete Rule
To review, Section 5 of the FTC Act gives the Commission the power to “prevent . . . unfair methods of competition.” The Commission adopted the Noncompete Rule on April 23, 2024. The Noncompete Rule declares most employee non-compete agreements to be “unfair methods of competition.”
The Commission claims it has authority to issue the Noncompete Rule under Section 6(g) of the FTC Act, which gives it the power “to make rules and regulations for the purpose of carrying out the provisions of this subchapter.”
The Court Rules That the Commission Exceeded its Authority
The court was not persuaded. “After reviewing the text, structure, and history of the Act,” the court concluded that “the FTC lacks the authority to create substantive rules through this method.”
With regard to the FTC Act’s text, the court held that Section 6(g) is just “a housekeeping statute,” authorizing only “rules of agency organization procedure or practice as opposed to substantive rules.”
On the FTC Act’s structure, the court noted that “Section 6(g) is the seventh in a list of twelve almost entirely investigative powers” and “fails to mention Section 5 or any other substantive authority” that would justify substantive rulemaking.
Regarding the FTC Act’s history, the court explained that, in its long history, the FTC had issued substantive rules under Section 6(g) only from 1962 to 1978, and had not made a substantive rule under Section 6(g) since 1978, until it issued the Noncompete Rule. While FTC Act amendments empowered the FTC to make substantive rules regarding “deceptive” trade practices, none of the amendments empowered the FTC to make substantive rules regarding “unfair” trade practices.
The Court Rules That the Noncompete Rule is Arbitrary and Capricious
Having concluded that the Noncompete Rule exceeded the Commission’s authority, the court further ruled that the Noncompete Rule is “arbitrary and capricious.” Specifically, the court held that the Noncompete Rule “is unreasonably overbroad without a reasonable explanation” and “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.”
The case is Ryan LLC v. Federal Trade Commission and is being heard in the U.S. District Court for the Northern District of Texas.
What’s Next
The decision provides a roadmap, and precedent, for other litigants to use in their own challenges to the Noncompete Rule. We expect litigation to continue through this year and beyond.
Most immediately, the U.S. District Court for the Eastern District of Pennsylvania, is considering a motion for a nation-wide preliminary injunction against the Noncompete Rule in ATS Tree Services, LLC v. The Federal Trade Commission, case number 2:2024-CV-01743. A decision is expected on or before July 23.
In the meantime, employers should remain aware that all state laws relating to non-competes remain in force and employers must still comply with them.
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If you have questions or would like additional information, please contact our Labor & Employment attorneys or the primary EGS attorney with whom you work.
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