iOn July 3, 2024, a federal judge in Texas issued a preliminary injunction barring the FTC from enforcing its proposed near-absolute national ban on non-competition agreements. The Rule was scheduled to take effect September 4, 2024, but the Court has postponed that effective date pending its final ruling, which it intends to issue by the end of August. The case is Ryan, LLC, v. Federal Trade Commission, No. 3:24-cv-986-E (N.D. Tx., July 3, 2024).
As we reported in our alert, the FTC voted to adopt its proposed noncompete Rule on April 23, 2024. The ban would have applied to all businesses, regardless of size, with exceptions only for senior executives and transactions involving the sale of a business. The FTC’s rationale for the Rule is that noncompete agreements constitute unfair competition because they reduce competition in labor markets.
However, Judge Ada Brown of the Northern District of Texas ruled that the FTC exceeded its rulemaking authority as provided by Congress in the FTC Act. She held that the FTC’s authority is limited in nature and does not extend to substantive rules such as the noncompete Rule.
Quoting from a Fifth Circuit case involving a different agency, Judge Brown noted that “[a]gencies do not have unlimited power to accomplish their policy preferences until Congress stops them; they only have the powers that Congress grants through a textual commitment of authority.” Central Forwarding, Inc., v. ICC, 698 F.2d 1266, 1272 (5th Cir. 1983). She concluded that based on the text and structure of the legislation creating the FTC, Congress did not grant the agency substantive rulemaking authority with respect to unfair methods of competition.
SCOTUS followers are of course aware that the U.S. Supreme Court issued a decision on June 28, 2024, (Loper Bright Enterprises v. Raimondo) overruling its 1984 Chevron decision, in which it had instructed federal courts to defer to administrative agencies’ interpretations of statutes within their areas of jurisdiction (known as “Chevron deference”). While Judge Brown made passing reference to the Loper Bright Enterprises decision, it seems clear from her opinion that she would have reached the same decision irrespective of whether the Supreme Court eliminated Chevron deference.
Judge Brown did not rule on several other bases for invalidating the Rule put forth by the plaintiffs, which we discussed in our May 14 alert. She did, however, agree with plaintiffs that even if the FTC has the authority to issue a substantive rule in this area, the Rule is likely to be found “arbitrary and capricious” because there is no rational connection between the FTC’s reasons for adopting the Rule and the Rule’s “sweeping” prohibition on virtually all noncompetes.
In order to obtain an injunction, plaintiffs had to show that they would suffer irreparable harm from the implementation of the Rule. The Court was satisfied that the impact of the sudden abrogation of many noncompete agreements, together with the immediate ban on new ones, satisfied that requirement.
A critical issue presented by this case is the appropriate scope of an injunction. Judge Brown determined that the record did not support issuing a nationwide injunction. She therefore limited the injunction to the named plaintiff (Ryan, LLC) and several business associations that intervened in the case on the plaintiffs’ side.
In light of the Rule’s September 4 effective date, the FTC cannot take any enforcement action before then. As noted, the Court has committed to issuing a final decision (most likely also against the FTC) by August 30. In that final decision, the Court could extend the injunction nationally, or it could keep its limited scope. In the latter case, the FTC could theoretically ignore the Court’s order except as to these particular plaintiffs and start enforcing the Rule in the rest of the country. In any event, the FTC will almost certainly appeal the final decision. Hence, employers will continue to face uncertainty for the time being.
We note that there is another case presenting a similar challenge to the FTC’s authority to ban noncompetes. The case is ATS Tree Services, LLC v. Federal Trade Commission, pending in the Eastern District of Pennsylvania. A judge has scheduled a hearing on the plaintiff’s request for a preliminary injunction for July 10, 2024, and is expected to rule later this month.At this stage of that case, it is not clear what the scope of any injunction might be (limited versus nationwide). A decision denying the injunction would set up a conflict between two federal courts, increasing the likelihood that the Supreme Court would eventually take up the issue.
In a future alert, we will look more closely at the potential outcomes and how employers ought to be planning for them. For now, however, employers are a bit less likely to face the cancellation of their noncompete agreements.
