/>iThe Supreme Court’s decision in Loper Bright Enterprises v. Raimondo has and will continue to alter the legality and enforceability of federal agency rules and regulations related to ambiguous federal statutes. As a reminder, Loper Bright abolished the Chevron doctrine, which instructed courts to give deference to federal agency interpretations of ambiguous statutes. In Loper Bright, the Supreme Court held that the Administrative Procedure Act (“APA”) requires courts to “exercise independent judgment” when evaluating the constitutionality of a federal agency’s rulemaking or interpretation of an ambiguous statute. For a more detailed discussion of the Loper Bright decision and its overruling effect on the Chevron doctrine, please refer to our earlier blog post, which discusses Loper Bright’s impact on the International Trade Commission. This blog post focuses on another agency that has already felt the impact of Loper Bright, the Federal Trade Commission (“FTC”).
Last year, the FTC issued a final rule banning employers from entering new noncompete clauses as well as enforcing some pre-existing noncompete clauses (“the Rule”). 16 CFR § 910. In its announcement of the Rule, the FTC stated that the ban will “promote competition . . ., protect[] the fundamental freedom of workers to change jobs, increas[e] innovation, and foster[] new business formation.” This employee-friendly ban, which in many ways mirrors the law of the state of California, was received with much concern by trade secret owners. Noncompete clauses are measures commonly used by rightsholders to protect their trade secrets. Rightsholders are thus concerned outgoing employees could freely move and disseminate valuable trade secrets to competitors.
Their concerns, however, may be assuaged due to two recent developments. First, an order from the Northern District of Texas, which set aside the Rule nationally, is pending appeal before the U.S. Court of Appeals for the Fifth Circuit. Second, the newly designated FTC Chairman, Andrew Ferguson, who was sworn in on January 20, 2025, has publicly criticized the Rule since its origin.
Below, we discuss the recent order from the Northern District of Texas and the pending appeal. Additionally, we evaluate the Rule’s likely fate following Chairman Ferguson’s appointment. And lastly, we provide rightsholders with a few helpful takeaways to protect their trade secrets amongst the uncertainty.
Ryan, LLC v. Federal Trade Commission
On the same day that the FTC promulgated the Rule, Ryan, LLC (“Ryan”) filed suit against the FTC challenging the constitutionality of the Rule. Shortly after filing suit, Ryan was joined by several plaintiff intervenors. Ryan, a global tax-consulting firm headquartered in Dallas, routinely requires its principals and other workers to agree to temporally limited noncompete clauses to protect Ryan’s trade secrets. Ryan argues the Rule threatens to harm its business secrets by allowing its employees to freely move to competitors. These harms, as Ryan alleges, cannot be mitigated through the use of non-disclosure agreements (“NDAs”) and trade secret law because of the violations of NDA and trade secret law are less visible and harder to prove than violations of noncompete agreements. Ryan further argues that this harm is not unique to its industry and that other businesses that own intellectual property and rely on skilled labor are exposed to the same risks under the Rule. After a litany of procedural and discovery challenges, Plaintiffs moved for summary judgment challenging the constitutionality of the Rule.
On August 20, 2024, District Court Judge Ada Brown issued an order granting Plaintiffs’ Motion for Summary Judgment holding the Rule unconstitutional and setting it aside with national effect. The Court, following the guidance of Loper Bright, explained that the APA was enacted “‘as a check upon administrators whose zeal might otherwise have carried them to excesses not contemplated in legislation creating their offices.’ Further following Loper Bright, the Court analyzed the constitutionality of the Rule under “the APA[, which] delineates the basic contours of judicial review of such action.” Under the APA’s Section 706(2)(A)-(C), “courts must ‘hold unlawful and set aside agency action, findings, and conclusions found to be … arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law,’ ‘contrary to constitutional right, power, privilege, or immunity;’ or ‘in excess of statutory jurisdiction, authority, or limitations, or short of statutory right.’”
The Court begins its analysis by evaluating whether the FTC had statutory authority to promulgate the Rule. In its analysis, the Court agreed with Plaintiffs, holding that the FTC exceeded its statutory authority in promulgating the Rule. The Court ruled that “the text and the structure of the FTC Act reveal the FTC lacks substantive rulemaking authority with respect to unfair methods of competition, under Section 6(g).” This wide sweeping rule effectively limits the FTC’s ability to regulate unfair competition to rules proffered under Section 5 of the FTC Act. The Court held the plain reading of Section 6(g) only gave the FTC authority to make rule for the purpose of classifying and regulating corporations, not regulating unfair competition. The Court also looked to the historical use of Section 6(g) and found that it was seldomly used to promulgate rules, noting that the FTC hadn’t promulgated a rule under Section 6(g) since 1978. In view of the text, which may come as a surprise. After reviewing the text, structure and history of the Act, the Court concluded that the FTC lacked substantive rule making authority under Section 6(g) and was only intended as a “’housekeeping statute’ authorizing what the APA terms ‘rules of agency organization procedure or practice’ as opposed to ‘substantive rules,’” quoting Chrysler Corp. v. Brown, 441 U.S. 281, 310 (1979). This ruling certainly raises an eyebrow or two as it appears the Court gave too much weight to the lack of rulemaking activity. First, the Court discredits a period of sixteen years from 1962 to 1978 where the FTC did promulgate substantive rules under Section 6(g). Second, and most notably, the Court’s ruling is contrary to a holding from the D.C. Circuit that concluded the FTC had rulemaking authority under section 6(g). In that 1973 case, National Petroleum Refiners Ass’n v. FTC, the court stated, “Our conclusion [that the FTC has substantive rule making authority under] Section 6(g) is not disturbed by the fact that the agency itself did not assert the power to promulgate substantive rules until 1962 and indeed indicated intermittently before that time that it lacked such power.”
Despite reaching the conclusion that the FTC lacked rule making authority under Section 6(g), the Court continues its analysis to determine if the Rule passes muster under the APA’s arbitrary-and-capricious standard. A rule “is arbitrary or capricious only when it is so implausible that it could not be ascribed to a difference in view or the product of agency expertise,” quoting the 5th Circuit’s 1993 decision in Wilson v. U.S. Dep’t. of Agric.. In concluding that the Rule did not pass muster, the Court explained, “the Rule is arbitrary and capricious because it is unreasonably overbroad without a reasonable explanation” and “imposes a one-size-fits-all approach with no end date.” The Court found that the FTC’s reasons for the Rule were neither reasonable nor rationally connected to a categorical ban of noncompete clauses. Although the FTC had studied state policies on noncompetes, none of the states had enacted a categorical ban as the Rule seeks to do. Moreover, each state that the FTC had studied enacted noncompetes based upon specific facts that made the corresponding noncompete reasonable for that state, without any explanation why any the state-specific noncompete policies were appropriate for nationwide application. This was “completely inapposite to the Rule’s imposition of a categorical ban.” On these grounds, the Court held that the Rule was unlawful and set it aside with nationwide effect.
Appellate Review
As expected, shortly after the Court granted summary judgment for Plaintiffs, the FTC filed a notice of appeal setting this case up for review by the U.S. Court of Appeals for the Fifth Circuit. It is still early days for the appeal with the FTC filing its opening brief on January 2, 2025. It is worth noting that the brief was filed by the FTC under the Biden Administration, so we expect the arguments presented therein will not be representative of the FTC under the Trump Administration. Accordingly, we expect the current administration to move to dismiss the appeal.
In an effort to save the appeal, on January 13, 2025, a triumvirate comprising individuals claiming some potential harm from the lower court setting aside the Rule moved to intervene as defendant-appellants (“the Proposed Intervenors”). In their motion, the Proposed Intervenors argue intervention is justified because the change in administration and changes to the FTC’s leadership create a substantial likelihood that the government will stop defending the Rule. The Motion for Intervention is opposed by both Plaintiff-Appellee Ryan and Defendant-Appellant FTC.
The Proposed Intervenors, however, face an uphill battle. The Fifth Circuit allows “intervention on appeal only in an exceptional case for imperative reasons.” As Ryan pointed out in its Opposition Brief, the Fifth Circuit “denied sixteen States’ motion to intervene in National Association for Gun Rights, Inc. v. Garland, which was premised on the same grounds as the motion at issue. Ryan and the FTC, in their respective briefs, further argue that new presidential administrations commonly decline to defend the prior administration’s regulatory actions, which supports a finding that this case is not exceptional.
Regardless of the Proposed Intervenors’ efforts to overcome the high bar before them, the issues on appeal may become moot should the FTC choose to rescind the Rule. This outcome appears likely because newly appointed FTC Chairman Andrew Ferguson has strongly opposed the Rule since its inception.
New FTC Chairman Opposes the Rule
As mentioned above, Chairman Ferguson officially took office on January 20, 2025. Prior to being appointed Chairman, he was a commissioner on the FTC and was one of two commissioners who voted against the Rule’s promulgation. He also authored a strongly-worded dissenting statement that criticized the Rule as “the most extraordinary assertion of authority in the Commission’s history.” He criticized the FTC for overstepping its rulemaking authority by issuing the Rule without clear congressional authorization. But while his dissent is scathing, Chairman Ferguson is not in favor of unregulated noncompete agreements. He sees sound justifications for regulations, but his position is that regulation should be left to the states or Congress.
Chairman Ferguson’s dissent does not mince words, calling the Rule “unlawful” and “violat[ing] the basic requirements of the [APA].” Given his strong opposition to the Rule, it would be a surprise if Chairman Ferguson does not rescind the Rule once he has the votes to do so.
What Now for Rightsholders
Although it seems extremely likely that the Rule will be rescinded, this is not likely to happen quickly. The Trump Administration has not identified rescinding the rule as a priority, and Chairman Ferguson has not made public statements about it following his appointment. Instead, the comments out of the FTC suggest that its focus is elsewhere. Another reason for delay is that a fifth commissioner must be appointed, necessitated by Lina Khan’s resignation. Therefore, it is likely that the Rule will be stuck in purgatory for the time being.
Therefore, rightsholders may want to exercise caution if they choose to enter or enforce contracts that contain noncompete clauses, since that action would technically violate the Rule. Industry experts think it is unlikely the FTC under Chairman Ferguson will take action against such technical violations. “Unlikely,” however, is not a guarantee, so rightsholders should beware that they are exposed to some risk if they choose to ignore the Rule under the assumption that it will be rescinded. In fact, the FTC has published a notice stating that it may still address unlawful “noncompetes through case-by-case enforcement actions.” Thus, to the extent a rightsholder is at all nervous about the legality of its noncompete clause but still feels the need to bring an action against a former employee based on trade secret misappropriation, it might consider whether the breach of the noncompete is truly additive to the process—that is, will the rightsholder have more leverage or be able to obtain better or greater relief by bringing the noncompete claim? For example, in many cases, a rightsholder could forego the breach of contract claim over the noncompete, and instead pursue claims under the Defend Trade Secrets Act. Proceeding in this manner would have the effect of minimizing the risk of FTC action while also preserving claims as to what the rightsholder really cares about: the misappropriation of its trade secrets.
In fact, there are numerous other trade secret protection mechanisms at their disposal that are just as, if not more, effective than noncompete clauses. For example, NDAs offer protection through contractual means, like noncompete clauses. Another excellent option is conducting exit interviews of outgoing employees. Exit interviews give the employer the opportunity to learn where the employee is leaving to and whether the new job is a competitor that should be subsequently monitored. Additionally, exit interviews let the employer remind the outgoing employee of any NDAs and inform them about the legal consequences of trade secret misappropriation. Further, an employer can control the number or level of employees with access to the hardware, software, and documents containing trade secrets. Further, where practicable, the rightsholder can employ software that tracks which employees access, edit, and/or copy what files. While this software sounds exotic, standard programs like Office 365 usually have these types of logs for basic data. Finally, rightsholders can limit access to facilities containing trade secrets to only those employees that are necessary for either utilizing or improving the trade secrets.
So, fret not, rightsholders, your trade secrets can still be adequately protected whether or not the Rule is rescinded.
