Federal District Court Enjoins the FTC’s Rule Banning Nearly All Non-Compete Agreements
Kathryn Bennett, Law Clerk
On July 3, 2024, the U.S. District Court for the Northern District of Texas granted plaintiff Ryan LLC’s and other plaintiff-intervenors’ (including the United States Chamber of Commerce) request for a preliminary injunction against the Federal Trade Commission and its recent Final Rule banning nearly all non-compete agreements, set to go into effect on September 4, 2024. While the Court’s injunction was limited to the named parties to the lawsuit, rather than nationwide, the ruling nonetheless provides a roadmap for other challenges to the rule.
The FTC’s Final Rule and Ryan LLC v. Federal Trade Commission
Earlier this spring, the Federal Trade Commission (“FTC”) announced its Final Rule (hereafter, “Rule”), banning non-compete agreements in nearly all employment circumstances, both retroactively and prospectively.[1] The Rule is poised to go into effect on September 4, 2024; however, it was challenged almost immediately after being announced in both the U.S. District Court for the Eastern District of Texas[2] and the U.S. District Court for the Northern District of Texas.[3]
Regarding the latter lawsuit—Ryan LLC v. Federal Trade Commission—the case was brought by tax preparation company Ryan, LLC, and the U.S. Chamber of Commerce as plaintiff-intervenors (collectively “Plaintiffs”), seeking a permanent injunction of the Rule for being arbitrary and capricious and otherwise beyond the scope of the FTC’s rule-making authority. The same challenge in the Eastern District of Texas was consolidated into Ryan under the first-to-file rule.
Preliminary Injunctive Relief Granted to Plaintiffs
On July 3, 2024, Judge Brown granted Plaintiffs’ request for a preliminary injunction, prohibiting the implementation of the Rule as against the Plaintiffs only, rather than enjoining the Rule nationwide. In its decision, the Court reasoned that, while the FTC has authority under Section 5 of the FTC Act (hereafter, “Act”) to issue regulations enforcing the Act’s procedures and practices, the section that the FTC relied on in issuing the non-compete ban – Section 6(g) – does not provide the agency with authority to issue “substantive rules” concerning unfair methods of competition.
In its reasoning, and in finding that Ryan LLC had a likelihood of success on the merits of the challenge, the Court explained that although Section 5 does provide the FTC with some ability to promulgate rules preventing unfair methods of competition, this provision was not a means by which the FTC could engage in substantive rulemaking. Rather, the authority granted by Section 5 is properly exercised when the FTC conducts administrative proceedings to decide whether a practice or procedure constitutes an unfair method of competition. Unlike Section 5, Section 6(g) does not include a penalty provision, which indicates that the authority it provides to the administrative agency is limited to issuing “housekeeping rules” which “support[] the adjudicatory proceedings” the FTC may conduct pursuant to Section 5 authority. For the first time since 1978, the Court notes, the FTC is attempting to use its Section 6(g) authority to issue a substantive rule. Neither the FTC Act nor the history of agency actions taken pursuant to the Act support this exercise of power, Judge Brown concluded.
The court is scheduled to issue a ruling on the merits of the challenge on or before August 30, 2024 and, if Judge Brown’s preliminary injunction becomes permanent at that time, then other challengers to the Rule will have a potent argument against the Rule’s validity and enforceability nationwide.
Employer Considerations
The impact of the FTC Rule remains indeterminate as the legal challenges to it continue to develop. Because the injunction issued in Ryan LLC is limited to the named Plaintiffs, all other covered employers are still currently subject to the ban against non-compete agreements beginning September 4, 2024. In the meantime, employers should continue to follow the development of this legal challenge to the enforceability of the FTC’s Rules pending a decision from the Northern District of Texas on the merits. Campbell Litigation, P.C. is available to answer questions about the best preparations employers can make concerning their existing non-compete agreements.
[1] See the Rocky Mountain Employer’s prior blog post discussing the Rule and its limited exceptions, available at https://www.rockymountainemployersblog.com/blog/2024/5/2/ftcs-final-rule-banning-most-noncompete-agreements-already-under-fire-in-federal-court.
[2] Chamber of Commerce v. Federal Trade Commission, No. 6:24-cv-00148 (E.D. Tex. Apr. 24, 2024).
[3] Ryan LLC v. Federal Trade Commission, Civ. Action No. 3:24-CV-00986-E (N.D. Tex. Apr. 23, 2024).