July was a busy month for courts analyzing the FTC’s rulemaking authority. In April, the FTC published its final rule banning most employment-based noncompetition agreements (the Noncompete Rule). Immediately after the FTC published the rule, several parties filed suit seeking an injunction to block the implementation of the Noncompete Rule. July saw decisions from cases filed in the Northern District of Texas and the Eastern District of Pennsylvania.

On July 3, 2024, in the case Ryan, LLC v. Federal Trade Commission, the Northern District of Texas granted an injunction preventing the Noncompete Rule from going into effect. The Northern District of Texas held that the FTC Act does not authorize the FTC to create broad substantive rules preventing unfair methods of competition. Rather, the Court held that Section 6(g) only authorizes the FTC to make “rules of agency organization procedure or practice” rather than “substantive rules.” Because the FTC relied on Section 6(g) to promulgate the Noncompete Rule, the Court held Ryan LLC would likely be successful on the merits of the case and blocked the Noncompete Rule from going into effect. However, the Court declined to issue a nationwide injunction, meaning the injunction only applied to the case before the Court.

Less than a month later, on July 23, 2024, in the case ATS Tree Services, LLC v. FTC, the Eastern District of Pennsylvania considered similar arguments but denied the Plaintiff’s motion for an injunction. Noting that the words “procedural” or “substantive” do not limit the language of Section 6(g), the Court held “it [is] clear that the FTC is empowered to make both procedural and substantive rules as is necessary to prevent unfair methods of competition.” The Court also stressed that the FTC’s purpose, as well as the goals of the FTC Act, supported its holding. The Eastern District of Pennsylvania also rejected a number of additional arguments from the Plaintiff, including: that (1) regulation of noncompetition agreements should be left to the states; (2) the Major Questions Doctrine applied and prevented the FTC from issuing the Noncompete Rule; and (3) Congress improperly delegated authority to the FTC.

The diverging rulings create significant uncertainty as to the FTC’s ability to issue substantive rules and the validity of the Noncompete Rule. The Noncompete Rule is set to take effect on September 4, 2024. Given there are other lawsuits still pending and appeals of the Northern District of Texas and Eastern District of Pennsylvania decisions are likely, it is unclear whether the fate of the Noncompete Rule will be decided by September 4.

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