Another Day, Another Limited Preliminary Injunction – This Time on the FTC’s Non-Compete Ban

By Parker E. Thoeni - Shawe Rosenthal LLP

July 5, 2024

On July 3, 2024, the U.S. District Court for the Northern District of Texas issued a preliminary injunction against the Federal Trade Commission’s (“FTC”) “Non-Compete Rule.” As we discussed in our April 24, 2024 E-Lert, on April 23, 2024, the FTC issued the Non-Compete Rule, banning nearly all non-compete provisions between employers and employees. Two of the five FTC Commissioners voted against issuing the Non-Compete Rule and offered dissenting views as to why the Commission should not have issued the Rule. Almost immediately, litigation was commenced by private parties to block the Non-Compete Rule from coming into effect on September 5, 2024.

One such lawsuit was filed in Texas by Ryan, LLC. The U.S. Chamber of Commerce and other trade associations also filed a lawsuit in Texas and subsequently intervened in the Ryan, LLC case. Another case was filed in Pennsylvania and is scheduled for oral argument on July 10, 2024.

In the Ryan, LLC case, the court determined that the FTC lacked the necessary authority to issue the Non-Compete Rule and that the Rule is likely arbitrary and capricious. The Court therefore postponed the effective date of the Rule as to the parties in that case only. The court, however, indicated that it intended to issue a final ruling by August 30, 2024, just prior to the effective date of the Rule for all other employers.

The FTC Lacked Authority to Issue the Non-Compete Rule

In coming to the conclusion that the FTC lacked the requisite authority to issue the Non-Compete Rule, the court first analyzed the Federal Trade Commission Act, which vests the FTC with the power to prevent unfair methods of competition. The court noted that the typical procedure for determining whether a party is engaged in unfair competition is through case-by-case administrative adjudication, and the additional powers of the FTC are largely investigatory or ministerial. Section 6(g) of the FTC Act empowers the FTC to make substantive rules regarding unfair methods of competition.

The FTC’s rationale supporting the Rule asserted that the FTC had authority to issue the Rule because non-competes constitute an “unfair method of competition.” The court held, however, that the FTC’s substantive rulemaking authority as it relates to unfair methods of competition is limited to procedural rules that implement the case-by-case administrative adjudication procedure referenced above. In reviewing the authority granted to the FTC by Congress, the court found that Congress had not authorized the FTC to engage in substantive rulemaking regarding unfair methods of competition, stating, “The role of an administrative agency is to do as told by Congress, not to do what the agency thinks it should do.”

The Non-Compete Rule is Likely Arbitrary and Capricious

The court also found that the Non-Compete Rule is likely arbitrary and capricious, which would justify setting the Rule aside under the Administrative Procedures Act. The court found that the support provided by the FTC for the Rule did not justify the expansive ban, noting that no state has ever issued a ban as expansive as the FTC’s ban on non-competes. The court emphasized that the FTC imposed a sweeping prohibition rather than targeting specific, harmful non-competes. The court also found that the FTC failed to adequately consider alternatives to the broad ban on nearly all non-competes. The court noted that the FTC should have analyzed whether there were reliance interests that would have justified a less disruptive alternative.

Next Steps

As noted above, the scope of the preliminary injunctive relief issued by the court was limited to delaying the effective date of the Rule as to Ryan, LLC only. While the court acknowledged that it was within its power to issue nation-wide relief, it decided that limited preliminary injunctive relief was more appropriate in this case. The court indirectly invited briefing on the topic of the appropriate scope of relief and indicated that it intends to issue a ”merits disposition” by August 30, 2024, meaning that it will make a final decision as to whether the Non-Compete Rule should be set aside prior to the September 5, 2024 effective date of the Rule. If the court elects not to issue a nationwide injunction or set aside the Rule, it has provided employers with a legal roadmap for challenging the Rule on their own.

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