On April 23, 2024, the Federal Trade Commission (“FTC”) issued a rule banning virtually all employment noncompete agreements in the United States.[1]  At least two federal lawsuits are seeking to stay the rule’s current effective date of September 4, 2024, and to permanently enjoin the FTC’s enforcement of the rule. This article analyzes the first of those lawsuits, Ryan, LLC v. FTC, in the United States District Court for the Northern District of Texas before the Honorable Judge Ada Brown.[2]

Plaintiffs

On the same day the FTC issued its final rule, Ryan, LLC (“Ryan”) filed suit.  Ryan is a global tax‑consulting firm headquartered in Dallas, Texas, that employs over 2,500 workers and provides services to over 30,000 clients.  On May 8, 2024, the U.S. Chamber of Commerce and a coalition of business organizations (referred to collectively as the “Chamber”) moved to intervene as plaintiffs in Ryan’s action.  On May 9, 2024, the court granted the motion to intervene.  Ryan and the Chamber (collectively, “Plaintiffs”) argue that the rule is illegal and bad public policy.

Plaintiffs’ Arguments

As to legality, Plaintiffs’ primary argument is that the FTC lacked authority to issue the rule.  The FTC based its rulemaking on Section 6(g) of the FTC Act, which states that the FTC may “[f]rom time to time classify corporations and . . . make rules and regulations for the purpose of carrying out the provisions of this subchapter.”[3]  The problem according to Plaintiffs is that Section 6(g) does not grant the FTC substantive rulemaking power for preventing unfair methods of competition. 

Plaintiffs argue instead that Section 5 of the FTC Act authorizes the FTC to prevent unfair methods of competition through case‑by‑case adjudication, and then Section 6 empowers the FTC to issue procedural rules to govern enforcement adjudications.  As Ryan’s brief contends, it is “unfathomable that Congress, in one half of one subsection of a provision addressing procedural matters, provided the [FTC] with the far‑reaching power to issue substantive rules categorically condemning economic practices as unfair methods of competition on a nationwide basis.” 

Plaintiffs contend that Congress apparently understood the structure of the FTC Act the same way because it enacted the Magnuson‑Moss Act in 1975.  That Act added Section 18 to the FTC Act, authorizing the FTC to issue “rules which define with specificity acts or practices which are unfair or deceptive acts or practices in or affecting commerce.”[4]  That addition would have been unnecessary if Section 6(g) already granted the FTC the power to issue substantive rules.   

In a related argument, Plaintiffs argue that the major questions doctrine precludes the FTC’s rule because Congress did not clearly delegate the authority to enact it.  That doctrine applies here, according to Plaintiffs, because the FTC’s rule has “enormous economic significance” and intrudes into the domain of state law.  The Chamber in particular emphasizes that the FTC has overstepped its authority here because not all noncompete agreements harm competition and the FTC’s rule is retroactive.  Further, even if Congress intended to grant rulemaking authority to the FTC, it failed to do so constitutionally in this case because the FTC Act contains no intelligible principle to guide the FTC’s work.  To the contrary, in the Plaintiffs’ view, Congress directed the FTC to enforce antitrust law through adjudication—not rulemaking.  

As to public policy, Plaintiffs cite caselaw and economic literature in arguing that noncompete agreements promote competition, incentivize investment and training, facilitate innovation, and protect intellectual property.  The Chamber’s brief goes so far as to argue that the FTC’s rule is arbitrary and capricious because, in the Chamber’s view, no evidence supported imposing a blanket ban instead of lesser alternatives (such as giving the rule only prospective effect).[5]

The FTC’s Response 

The FTC responds that Section 6(g) of the FTC Act nowhere contains the textual limitation that Plaintiffs describe.  Just the opposite: that Section grants the FTC authority to “make rules and regulations for the purpose of carrying out the provisions of this Act,” including Section 5(a)’s prohibition on unfair methods of competition.[6]  The FTC cites caselaw supporting its interpretation of Section 6(g).

Such a grant of authority, according to the FTC, would not violate the major questions doctrine because that doctrine only applies when an agency exceeds its area of expertise.  The FTC’s noncompete ban is in line with the FTC’s “core mandate” to prevent unfair methods of competition in commerce.  The FTC’s rule does not retroactively make past conduct illegal; rather, it makes certain contractual terms unenforceable going forward.  The FTC further contends that the FTC Act satisfies the minimal requirement of containing an intelligible principle for regulating unfair methods of competition.  According to the FTC, the Supreme Court has rejected “intelligible principle” challenges to far more sweeping delegations, including directives to set just and reasonable rates, fair and equitable prices, and air quality standards.

The FTC’s view as to public policy is that all noncompete agreements hinder competition and impose negative consequences.  Employers can protect their business secrets through other means that do not burden competition, including through nondisclosure agreements.  The public interest favors letting the rule take effect, according to the FTC, because the noncompete ban will increase the formation of new businesses, foster innovation, increase wages, decrease health care spending, and protect a worker’s freedom.[7]

What Comes Next?

On June 13, 2024, District Judge Brown notified the parties that the court would not hold a hearing on Plaintiffs’ motions.  However, Judge Brown has notified the parties that she will issue a decision on the motions by July 3, 2024.

Stay tuned!

The Firm greatly appreciates the hard work of its summer clerk George Bennett in helping to research and draft this article.

[1] Our Firm published an article about the Rule shortly after its finalization in April 2024.

[2] ATS Tree Services, LLC v. FTC is currently pending in the Eastern District of Pennsylvania.  A third lawsuit, filed by the United States Chamber of Commerce and other organizations in the Eastern District of Texas, was stayed in favor of the Ryan action.  As discussed in this article, the District Court in Ryan has permitted the Chamber and the other organizations to intervene.  This article includes summaries of the intervenors’ positions.

[3] 15 U.S.C. § 46(g). 

[4] 15 U.S.C. § 57a(a)(1)(B). 

[5] Ryan also argues that the FTC is unconstitutionally structured because its commissioners are insulated from the President’s removal powers.

[6] 15 U.S.C. § 46(g).

[7] As to Ryan’s challenge to the FTC Act’s removal restrictions, the FTC does not substantively respond but instead contends that binding Fifth Circuit caselaw precludes the challenge altogether.  See Illumina, Inc. v. FTC, 88 F.4th 1036, 1047 (5th Cir. 2023) (“[W]hether the FTC’s authority has changed so fundamentally as to render Humphrey’s Executor no longer binding is for the Supreme Court, not us, to answer.”).