As we have spoken about previously here on the blog, the Federal Trade Commission (FTC) made headlines earlier this year with its ban on non-compete agreements, which was issued on April 24, 2024. The ban was supposed to go into effect on September 4, 2024. However, as discussed herein, the United States District Court for the Northern District of Texas, Dallas Division, determined on August 20, 2024 that the FTC lacked the statutory authority to implement the ban – therefore, it did not go into effect.
The ban was supposed to apply to non-compete agreements that are “unfair methods of competition” under Section 5 of the FTC Act. This would include agreements that restrict employees from working for competitors after leaving their current employer. The prohibition extended to both existing and future non-compete agreements, regardless of when they were entered into, with certain exceptions.
In Ryan, LLC v. Federal Trade Commission, 2024 WL 3879954 (N.D. Texas, Dallas Division, August 20, 2024), the Court held the following: 1) The FTC lacked the statutory authority to create substantive rules to preclude unfair methods of competition; 2) the structure and location of the provision granting the FTC the power to classify corporations and to make rules and regulations indicated that Congress did not explicitly give the FTC substantive rulemaking authority; 3) the history of the FTC Act supported a finding that the FTC lacked the authority to promulgate substantive rules; 4) the structural amendments added since the inception of the Act supported a finding that the FTC lacked the authority to promulgate substantive rules; 5) the regulations were arbitrary and capricious; 6) the FTC failed to sufficiently address alternatives; and 7) the Administrative Procedure Act (APA) required holding that the regulations are unlawful and setting them aside. See Ryan, LLC, 2024 WL 3879954.
In response to the FTC’s promulgation of the Non-Compete Rule (the “Rule”), the Plaintiff, as well as other Plaintiff-Intervenors, sought an injunction to stay enforcement of the Rule. The Court granted a preliminary injunction in July 2024. Plaintiffs argued that (1) the Rule exceeded the FTC’s statutory authority; (2) that it was patently unconstitutional; and (3) that it was arbitrary and capricious. The Court agreed. In its most recent decision, the Court determined that the FTC Act “does not expressly grant the Commission authority to promulgate substantive rules regarding unfair methods of competition.” Id. at 9. The Court further concluded that, although the FTC has some authority to promulgate rules to preclude unfair methods of competition, it lacks the authority to create substantive rules through this method. Id. Plaintiffs’ arguments were further supported by the lack of a statutory penalty for violating rules promulgated under Section 6(g) of the FTC Act. The Court concluded that the structure and location of Section 6(g) of the FTC Act indicate that Congress did not explicitly give the FTC substantive rulemaking authority. An analysis of subsequent amendments to the FTC Act did not change the Court’s conclusion.
Lastly, the Court determined that, in addition to the FTC’s lack of substantive rulemaking authority to promulgate the Rule, the Rule is arbitrary and capricious because it is “unreasonably overbroad without a reasonable explanation.” Id. at 13. Further, “[t]he 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.'” Id. The Court found that the FTC lacked evidence as to why they chose to impose such a sweeping prohibition, rather than targeting specific, harmful non-competes, and that it failed to sufficiently address alternatives to issuing the rule. Id.
Based upon the foregoing, the Court held the Rule is unlawful and set it aside. Id. at 14. The Rule, therefore, could not take effect on its effective date of September 4, 2024, or thereafter. Id. The FTC states on its website that it is considering an appeal, but for now, the Rule will not go into effect and non-compete agreements will continue to be regulated through state caselaw and statutes.
Disclaimer: The information contained in this post is not, nor is it intended to be, legal advice. You should consult an attorney for advice regarding your individual situation. We invite you to contact us and welcome your calls and communications. Contacting us, however, does not create an attorney-client relationship.
