On August 20, a federal court in Texas issued an order invalidating the Federal Trade Commission’s (FTC) ban on noncompete agreements (Final Rule), which had been set to take effect on September 4, 2024. The decision, issued in Ryan LLC v. Federal Trade Commission, 3:24-cv-00986 (N.D. Tex.), significantly alleviates the uncertainty and disruption that would have accompanied the ban if it had gone into effect. The order has a nationwide impact and is not restricted to the litigants in the case. Along with its decision, the Court also issued a final judgment directing, in no uncertain terms, that the FTC’s ban shall not be enforced and shall not take effect.
Relevant Background
As previously reported, shortly after the rule was announced, the tax firm Ryan LLC, together with the U.S. Chamber of Commerce and others, challenged the FTC’s authority to promulgate the Final Rule pursuant to a federal law called the Administrative Procedures Act (APA). In July, the Court heard arguments from the parties and issued an order that enjoined the FTC from implementing or enforcing the Final Rule as to the parties involved in the case. The Court then invited submissions from the parties and others regarding a broader application of its decision before deciding on the merits.
Late last month, both Ryan LLC and the FTC filed Motions for Summary Judgment, and other interested parties also submitted briefs in support of their respective positions. Ryan LLC generally argued that the Final Rule exceeds the FTC’s statutory authority, is patently unconstitutional, and is arbitrary and capricious under the APA, rendering it unlawful.
Analysis and Reasoning
The Court’s order of August 20 largely agreed with the plaintiffs. In a detailed, written opinion, the Court concluded that the FTC lacked statutory authority to promulgate the rule, and that it was unlawful for the agency to do so because it had exceeded its rulemaking authority.
The Court examined the text, structure, and history of the FTC and its enabling legislation, including the Federal Trade Commission Act (the Act). In so doing, the Court determined that the Act did not grant the FTC the authority to promulgate “substantive rules regarding unfair methods of competition” such as the Final Rule. While the FTC did have some rulemaking authority, that authority did not extend to the substantive rule at issue. The Court reasoned that Congress had not explicitly provided substantive rulemaking authority to the FTC, and that the agency’s role was to do as it had been told by Congress, not “what the agency thinks it should do.” In sum, the Court concluded that the text and structure of the FTC Act and its related legislation showed a lack of substantive rulemaking authority concerning unfair methods of competition, and that the FTC had exceeded its authority by issuing the Final Rule.
The Court also determined that the Final Rule is “arbitrary and capricious” under the APA because it was unreasonably overbroad, and tries to impose “a one-size-fits-all approach with no end date.” Rather than targeting specific, harmful noncompetes, the Final Rule would prohibit parties from entering into or enforcing virtually all noncompetes, and the FTC had not considered any positive benefits of these agreements, but disregarded a substantial body of evidence that supports them. As such, the Court held, the FTC’s promulgation of the Final Rule was unlawful.
Remedies
The Court reasoned that, in light of its determination that the FTC had exceeded its statutory authority in issuing the Final Rule, and its determination that the rule is “arbitrary and capricious” under the law, it must hold the Final Rule unlawful and set it aside. The Court specifically noted that the APA does not contemplate party-restricted relief, and other cases had set aside agency actions with “nationwide effect.” Accordingly, the Court held that its order nullifying the rule “affects persons in all judicial districts equally,” and it issued an order that the Final Rule “shall not be enforced or otherwise take effect on September 4, 2024, or thereafter.”
Key Takeaways
At least for the foreseeable future, the Court’s decision reinstates the status quo that existed prior to the FTC’s issuance of the Final Rule. Companies may continue to utilize and enforce non-compete agreements and similar restrictive covenants, so long as they comply with existing state law. It is possible the Court may suspend its decision if the FTC appeals the order, though the Fifth Circuit Court of Appeals may be disinclined to reverse the judgment.
Likewise, the FTC (or another agency) may attempt to issue a narrowed set of regulations limiting the use of these restrictive covenants in the future. Either scenario would take months, if not years. And, finally, the FTC retains the ability to bring enforcement actions against specific companies that use noncompetes in an allegedly “unfair” manner in violation of the Act.
Regardless of these recent developments, Companies may want to take the opportunity to review their use of these restrictive covenants and evaluate strategies to protect their business interests.
