News & Insights

Federal Court in Texas Sets Aside FTC’s Non-Compete Rule

August 23, 2024

By: Stephen B. Stern

     Last month, in Ryan, LLC v. Federal Trade Commission, Civil Action No.: 3:24-CV-00986-E (N.D. Tex. July 3, 2024), the United States District Court for the Northern District of Texas issued a preliminary injunction that prohibited the Federal Trade Commission (“FTC”) from implementing or enforcing its recently issued final rule that seeks to ban most non-compete agreements nationwide.  The injunction, however, did not apply nationwide and was limited to the plaintiffs that filed and intervened in the lawsuit against the FTC.  Earlier this week, that same court in the same case granted summary judgment to the plaintiffs in Ryan, set aside the FTC rule, barred the FTC from enforcing the rule, and determined that the rule shall not take effect on September 4, 2024.  See Ryan, LLC v. Federal Trade Commission, Civil Action No.: 3:24-CV-00986-E, 2024 U.S. Dist. LEXIS 148488 (N.D. Tex. Aug. 20, 2024).

     In Ryan, after the court issued the preliminary injunction, Ryan, LLC (“Ryan”), the Chamber of Commerce of the United States of America (the “US Chamber”), Business Roundtable (the “Roundtable”), Texas Association of Business (“TAB”), and Longview Chamber of Commerce (the “Longview Chamber”) filed motions for summary judgment that sought to set aside the Non-Compete Rule.  The FTC filed its own cross-motion for summary judgment, seeking to defeat the plaintiffs’ claim.  (For the sake of brevity, rather than repeat the provisions of the Non-Compete Rule and the court’s prior analysis, see here for a discussion of the Non-Compete Rule and see here for a description of the court’s prior decision that granted the preliminary injunction).

     The court explained that, under the Administrative Procedure Act (“APA”), a court must “hold unlawful and set aside agency action, findings, and conclusions found to be . . . arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law,” “contrary to constitutional right, power, privilege, or immunity,” or “in excess of statutory jurisdiction authority, or limitations, or short of statutory right.”  Just as the court did when it issued its preliminary injunction, the court found that “a plain reading” of Section 6(g) of the Federal Trade Commission Act (the “Act”) “does not expressly grant the [FTC] authority to promulgate substantive rules regarding unfair methods of competition.”  It also found (again) that Section 57a of the Act empowers the FTC to make “interpretive rules and general statements of policy with respect to unfair or deceptive acts or practices in or affecting commerce[,]” which the court found limits the FTC’s authority to making rules dealing with “unfair or deceptive practices – not unfair methods of competition.” (emphasis added by the court).  The court further found (again) that parts of Section 57a also provide the FTC with some rulemaking power “with respect to unfair methods of competition in or affecting commerce.”  Ultimately, however, the court determined that, upon “reviewing the text, structure, and history of the Act, . . . the FTC lacks the authority to create substantive rules through this method” and, thus, Section 6(g) is limited to making ‘“rules of agency organization procedure or practice’ as opposed to ‘substantive rules.’”  The court then noted that the lack of a penalty provision in Section 6(g) of the Act further buttressed its decision, and it proceeded to analyze other parts of the statute, as well as its history, to further support its conclusion that the Act does not authorize substantive rulemaking.  As such, the court found that the FTC “exceeded its statutory authority” in issuing the Non-Compete Rule.

     Next, the court determined that the Non-Compete Rule was “arbitrary and capricious because it is unreasonably overbroad without a reasonable explanation.”  In this regard, the court found that the Non-Compete 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.”’  To this end, the court found that the FTC relied on a number of studies that examined the economic effects of various state policies regarding non-compete agreements, with no state having enacted a policy regarding non-compete agreements as broad as the FTC’s Non-Compete Rule.  Significantly, the court found that the FTC “compare[d] different states’ approaches to enforcing non-competes based on specific factual situations – completely inapposite to the [Non-Compete] Rule’s imposition of a categorical ban.”  Additionally, the court found that the FTC’s decision to “prohibit[] entering or enforcing virtually all non-competes – instead of targeting specific harmful non-competes, renders the Rule arbitrary and capricious.”  Furthermore, according to the court, the record showed that the “FTC failed to sufficiently address alternatives to issuing the Rule.”

     For these reasons, the court found the FTC “lacks statutory authority to promulgate the Non-Compete Rule, and that the [Non-Compete] Rule is arbitrary and capricious” and, as such, the Non-Compete Rule constitutes “an unlawful agency action.”  Accordingly, the court set aside the Non-Compete Rule and held the FTC could not enforce it and it would not take effect on September 4, 2024.

     The court’s decision to grant summary judgment and set aside the Non-Compete Rule in Ryan is significant because it is a broader decision than its earlier decision that limited the scope of the preliminary injunction banning enforcement of the Non-Compete Rule only to those parties in the lawsuit.  Although the court set aside the Non-Compete Rule in Ryan and held that the FTC could not enforce it, businesses should still consult with their counsel about the significance of the ruling and what it means for their ability to utilize non-compete agreements, as there is a contrary decision from a different court that found the FTC’s Non-Compete Rule could be enforced (see here).  These issues are likely to continue to play out in litigation, including at the appellate level.