On August 20, 2024, Judge Ada E. Brown of the U.S. District Court for the Northern District of Texas issued an order granting summary judgment to the plaintiffs in Ryan LLC v. Federal Trade Commission, a lawsuit challenging the legality of the FTC's Final Rule prohibiting non-compete agreements. Judge Brown found that the Final Rule both exceeded the FTC's statutory authority and was arbitrary and capricious because it "is unreasonably overbroad without a reasonable explanation." Her decision is the Federal courts' first final decision on the Final Rule, but it conflicts with a Pennsylvania decision on preliminary injunction proceedings, issued just last month. Thus, we haven't seen the last decision on the FTC's non-compete rule.
On April 23, 2024, the FTC issued its Final Rule prohibiting non-compete agreements, which would take effect 120 days later, on September 4, 2024.[1] The Final Rule prohibited new non-compete agreements entered into after the effective date and freed employees other than "senior executives" from existing non-compete agreements. The same day the Final Rule was issued, however, Ryan LLC (a tax services firm with its headquarters in Dallas, Texas) sued the FTC, seeking to prevent the Final Rule from ever going into effect. Ryan was later joined by a number of intervenors, including the U.S. Chamber of Commerce and the Business Roundtable. Ryan's lawsuit was based on the Administrative Procedure Act ("APA") and argued: (1) the FTC exceeded its statutory authority by issuing the Final Rule, (2) the FTC's Final Rule was an unconstitutional usurpation of Congressional power, and (3) the Final Rule was arbitrary and capricious.
The plaintiffs (both Ryan and the intervenors) filed a motion for preliminary injunction in June, and Judge Brown granted the preliminary injunction on July 3, 2024, enjoining the FTC from implementing the Final Rule against the plaintiffs and staying the effective date of the Final Rule. But the injunction applied only with regard to the named plaintiffs, not to all parties. Then, less than three weeks later, Judge Kelley B. Hodge of the U.S. District Court for the Eastern District of Pennsylvania entered an order in ATS Tree Services, LLC v. FTC denying a motion for preliminary injunction against the enforcement of the Final Rule. There was therefore some question whether Judge Brown might reconsider her stance.
She did not, and instead granted summary judgment to the plaintiffs, finding that the Final Rule violated the APA and "shall not be enforced or otherwise take effect on September 4, 2024, or thereafter." Her review started with the text, structure, and history of enforcement under the FTC Act. Section 5 of the FTC Act empowers the FTC to "prevent persons, partnerships, or corporations . . . from using unfair methods of competition in or affecting commerce and unfair or deceptive acts or practices in or affecting commerce."[2] Section 6 of the Act then provides the Commission the power to make rules and regulations to carry out the purposes of § 5.[3] Further, § 18 provides the FTC the power to promulgate "interpretive rules and general statements of policy with respect to unfair or deceptive acts or practices in or affecting commerce."[4] In the context of the FTC Act, however, Judge Brown found that those rulemaking provisions allow making only interpretive or procedural, not substantive, rules with regard to unfair methods of competition. She further found that the lack of statutory sanction provisions for violation of rules and the FTC's practice under the Act (promulgating no substantive unfair competition rules for more than the past 50 years and instead enforcing its mandate judicially) confirm her interpretation of the rulemaking provisions of the FTC Act. Thus, Judge Brown found the enforcement mechanism of the FTC Act allows only adjudicative, not rule-based, enforcement. As a result, any substantive rulemaking with regard to unfair competition, including the Final Rule would exceed the FTC's statutory authority.
Judge Brown also found the Final Rule to be arbitrary and capricious, despite the FTC's consideration of over 26,000 comments and over 500 pages of explanation of why the Final Rule was adopted. In one of the first applications of the Supreme Court's Loper Bright case,[5] which overturned Chevron deference, Judge Brown independently considered both the support provided by the underlying studies and comments and whether the remedies adopted by the Final Rule were properly scoped. She found neither to be the case. First, quoting the standard established by the Supreme Court, she found, "The Rule imposes a one-size-fits-all approach with no end date, which fails to establish a 'rational connection between the facts found and the choice made.'"[6] Second, she found that the record did not support the Final Rule because no state has enacted a non-compete rule as broad as the Final Rule,[7] and the FTC failed to explain why a less broad prohibition would be insufficient to satisfy the needs of the public. Thus, considering the evidence essentially de novo, Judge Brown found the Final Rule to be unsupported by the record.
Notably, Judge Brown did not rule on the constitutional arguments raised by the plaintiffs. It is not clear if she did so under the Last Resort Rule (under which courts avoid resolving constitutional questions if there is some other ground sufficient to support the court's decision) or some other reason. But those questions still lurk in the background, and may be resuscitated if an appellate court overturns Judge Brown's decision.
In addition to a possible direct appeal from the decision in the Ryan case, the FTC is continuing to litigate the Final Rule in the ATS Tree Services case. Since the ATS Tree Services case is pending in the Third Circuit, seen as less conservative than the Fifth Circuit in which an appeal of the Ryan case would lie, the FTC may prefer that forum for appellate review. However, wherever an appeal is heard, it is not unlikely the case ends up before the Supreme Court, which would have an opportunity not only to drive a stake deeper into the heart of Chevron deference by clarifying (and narrowing) the scope of the FTC Act, but also to narrow deference to agencies on the basis for their decisions. Judge Brown limited the FTC's arguments against her ruling that the Final Rule was arbitrary and capricious to those set forth in the Final Rule, but allowed the plaintiffs to introduce additional evidence to rebut the factual record set forth therein. As a result, under the analytical framework applied here, the FTC is fighting with one hand tied behind its back.
The Ryan District Court's decision will not be the final word on the FTC's non-compete rule, but it creates a difficult hill for the government to climb. Indeed, under the reasoning set forth, the FTC cannot adopt any substantive rule to diminish unfair competition -- regardless of whether it is tied to restrictive covenants or otherwise. But even if the FTC can adopt substantive competition rules on other topics, it appears the eight years of work and thousands of comments from the public on non-compete agreements may be all for naught.
[1] For a discussion of the FTC rule, including the possibility that it would be struck down by the courts, see https://www.patentdocs.org/2024/04/ftc-bans-non-compete-agreements.html.
[2] 15 U.S.C. § 45(a)(2).
[3] 15 U.S.C. § 46(g).
[4] 15 U.S.C. § 57a.
[5] Loper Bright Enters. v. Raimondo, 144 S. Ct. 2244 (2024).
[6] Quoting Motor Vehicle Mfrs. Ass'n of U.S., Inc. v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43, 103 S. Ct. 2856, 2867, 77 L. Ed. 2d 443 (1983) (quoting Burlington Truck Lines, Inc. v. United States, 371 U.S. 156, 168, 83 S. Ct. 239, 246, 9 L. Ed. 2d 207 (1962)).
[7] As a practical matter, California's ban on non-compete agreements between employers and employees is as broad as the FTC Final Rule. But Judge Brown relies on her preliminary injunction opinion rather than performing a state-by-state analysis here.
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