On July 3, 2024, United States District Court Judge Ada Brown ruled against the Federal Trade Commission (FTC) and issued a preliminary injunction postponing the implementation of the agency’s controversial rule banning noncompete clauses. The decision, in Ryan vs. Federal Trade Commission, is incredibly narrow, only applying to the named parties in the lawsuit. The injunction will stand as the Texas-based court considers the remainder of the case, with a final decision expected on or before Aug. 30, 2024. The prospect of a nationwide injunction or a vacatur of the rule is not out of the conversation and could still issue with the final decision.

Decision Details

The court based its decision on its interpretation of Sections 5 and 6 of the FTC Act. The FTC argued that these passages, which define unfair labor practices and outline the FTC’s ability to prevent such practices, protected the rule. The plaintiff disputed the agency’s reasoning, claiming this was a false interpretation and an example of government overreach.

While the final decision is still months out, Judge Brown granted the stay due to her belief that the complainant would prevail on the merits and the risk of immediate harm was evident. The Trump-appointed judge concluded that, while the FTC Act allowed the agency to “promulgate rules to preclude unfair methods of competition,” it did not contemplate rulemaking on this level. She wrote that the FTC overextended its congressionally granted power in pursuing this policy.

The court also found the rule is arbitrary and capricious by being overly broad and lacking just cause for its creation. It ruled that the FTC did not provide substantial evidence of harm for an all-encompassing rule to be required. The judge also excoriated the FTC for not considering proper alternatives to its perceived issues with noncompete agreements.

Next Steps

The court’s narrow ruling draws more interest toward the reasoning explained above. Combined with the recent overturning of the Chevron defense in Loper Bright Enterprises v. Raimondo, it does appear the noncompete rule is standing on shaky legal footing at this point (which is not necessarily surprising considering that two of the five FTC commissioners voted against the rule, in part because they believed that the FTC lacked the authority to promulgate such a rule). Judge Brown’s ruling echoed this sentiment, writing that the “role of an administrative agency is to do as told by Congress, not to do what the agency thinks it should do.” The FTC has pledged to continue to fight for the rule, while opponents are still anticipating a nationwide injunction or possible vacatur of the rule before the effective date of Sept. 4, 2024, either by Judge Brown or the other federal district courts where similar challenges to the FTC’s rule are pending.