On July 3, 2024, the United States District Court for the Northern District of Texas (Brown, J.) granted motions to preliminarily enjoin the Federal Trade Commission from enforcing its noncompete ban against parties challenging it.  Our Firm previously published an article summarizing the parties’ positions and an article summarizing the ban itself.

The Court intentionally limited its injunction to the FTC’s enforcement of the ban against the plaintiff and intervenors before it—Ryan LLC, Chamber of Commerce of the United States of America, and others—despite that Ryan LLC appeared to have moved for a nationwide injunction.  The Court reasoned that the “circumstances” did not justify enjoining the FTC’s enforcement of the ban outside of the parties in the action.  Nonetheless, the Court’s broad reasoning would support enjoining enforcement of the ban against any employer.

Likelihood of Success on the Merits

First and foremost, the Court held that Section 6(g) of the Federal Trade Commission Act, on which the FTC grounded its authority to ban noncompete agreements, “does not expressly grant the Commission authority to promulgate substantive rules regarding unfair methods of competition.”  That Section, according to the Court, instead authorizes the FTC to promulgate “rules of agency organization procedure or practice.”  The Court drew these conclusions after making various observations about Section 6(g): (1) it contains no sanctions for violating rules promulgated under that Section; (2) it begins by authorizing the FTC to “classify corporations” and then to issue rules—an odd sequence if the latter authorization contained broad substantive power; (3) it is “the seventh in a list of twelve almost entirely investigative powers”; and (4) it never references Section 5 of the FTC Act or any other authority for substantive rulemaking power.

Although the Court cited the Supreme Court’s then-5-day-old decision in Loper Bright Enterprises v. Raimondo to end Chevron deference (which decision our Firm analyzed here), the Court did not seem otherwise inclined to defer to the FTC’s interpretation of Section 6(g).  To the contrary, the Court stated that its holding followed from a “plain reading” of that Section.

Second, the Court held that the structure and history of the Act supported its reading of Section 6(g).  For one thing, the FTC itself disclaimed substantive rulemaking authority under Section 6(g) until 1962 and then refrained from promulgating any substantive rule under that Section from 1978 until it issued its noncompete ban.  Congress also amended the Act in 1967 and 1968 to “allow[] force of law rulemaking related to specific subjects,” excluding unfair methods of competition.  Those amendments would have been superfluous if the FTC already had substantive rulemaking power under Section 6(g).

Third, the Court held that the FTC’s noncompete ban was arbitrary and capricious.  This was because “the Commission relied on a handful of studies” to enact a “sweeping prohibition” that “no state has ever enacted.”  The FTC’s empirical evidence was “inconsistent and flawed,” and in relying on that evidence, the FTC “disregard[ed] the substantial body of evidence supporting [noncompete] agreements.”  The FTC also failed to explain its rejection of narrower possible alternatives to its far-reaching rule.

Irreparable Harm, Balance of Equities, and Public Interest

The Court further held that, without a preliminary injunction, the plaintiff and intervenors would suffer irreparable harm from complying with an invalid rule. Most immediately, by September 4, 2024, the parties would otherwise have to satisfy the rule’s requirement to notify all current and former employees under the terms of a noncompete agreement that the employer will not enforce the agreement.  The costs of such notification would be “nonrecoverable.”

An injunction would also serve the interests of equity and the public—interests that “merge” when the defendant is the Government—because it would “maintain[] the status quo and prevent[] the substantial economic impact of the Rule.”[1]

Looking Forward

The Court’s opinion indicated that it would make a final decision on the merits of the action by August 30, 2024—just five days before the FTC’s ban is scheduled to affect all other employers.

[1] Despite this reference to the rule’s “substantial economic impact,” the Court nowhere endorsed (or rejected) the plaintiff and intervenors’ contention that the “major questions doctrine” prohibited the FTC from banning noncompete agreements.