Federal District Court Stays Implementation of FTC’s Non-Compete Rule

July 5, 2024

By: Stephen B. Stern

     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 prohibits 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, does not apply nationwide and is limited to the plaintiffs that filed and intervened in the lawsuit against the FTC.

     In Ryan, Ryan, LLC (“Ryan”), sued the FTC and was joined by 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”) as intervenors.  The lawsuit sought to prohibit the FTC from implementing and enforcing its recently issued final rule that bans most non-compete agreements nationwide (the “Non-Compete Rule” or “Rule”).  (See here for a discussion of the Non-Compete Rule).  The plaintiffs claimed the Non-Compete Rule was unlawful because (1) the FTC acted without statutory authority, (2) the Rule is the result of an unconstitutional exercise of power, and (3) the FTC’s acts, findings, and conclusions were arbitrary and capricious.  Shortly after filing suit, the plaintiffs filed a motion to stay the effective date of the Non-Compete Rule and for a preliminary injunction.

     To grant a motion for preliminary injunction, the court must find that there is a substantial likelihood the party seeking the injunction will prevail on the merits, there is a substantial threat of irreparable harm in the absence of the injunction, the balance of the equities favors issuing the injunction, and the injunction serves the public interest.

     In analyzing the likelihood of success on the merits, the court first considered the plaintiffs’ challenge to whether the FTC had authority to issue substantive rules under Section 6 of the Federal Trade Commission Act (the “Act”).  The court examined the text of Section 5 of the Act, which provides that the FTC is “empowered and directed to prevent persons, partnerships, or corporations . . . from using unfair methods of competition in or affecting commerce and unfair or deceptive acts of practices in or affecting commerce[,]” and Section 6, which provides the FTC with the power “to make rules and regulations for the purpose of carrying out the provisions of this subchapter.”  The court found that “a plain reading of Section 6(g) of the Act does not expressly grant the [FTC] authority to promulgate substantive rules regarding unfair methods of competition.”  A different provision of the Act, however (Section 57a of the Act), states that the FTC has the ability to issue “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), but the court also found that parts of Section 57a also provide the FTC with some rulemaking power “with respect to unfair methods of competition in or affecting commerce.”  

     Despite finding the Act provides the FTC with rulemaking authority to preclude unfair methods of competition, the court found, based on the text, structure, and history of the FTC, the FTC lacked the authority to issue the Rule.  The court found Section 6(g) of the Act specifically authorizes ‘“rules of agency organization procedure or practice’ as opposed to ‘substantive rules.’”  The court buttressed its conclusion about the lack of substantive rulemaking authority by noting there was no statutory penalty for violating rules promulgated under Section 6(g).  In this regard, the court noted that Congress has historically prescribed sanctions for violating an agency’s rules.  “If the statute prescribed a sanction, then the authority to make ‘rules and regulations’ included the authority to adopt legislative rules having the force of law . . . [but] [i]f the statute did not include a sanction, the authority to make ‘rules and regulations’ encompassed only interpretative or procedural rules.”  The court further examined the structure of the Act and its history of amendments to further support its finding that the FTC does not have substantive rulemaking authority to issue the Non-Compete Rule.

     The court then analyzed whether the FTC’s actions and findings were arbitrary and capricious because, 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.”  Under the “arbitrary and capricious standard,” the court looked at whether the FTC “reasonably considered the relevant issues and reasonable explained the decision[,]” which is a limited and deferential standard.

     The court found that the evidence proffered by the FTC did not warrant the Non-Compete Rule’s “expansive ban.”  The court noted that no state has ever enacted a non-compete rule as broad as the Rule promulgated by the FTC.  The court also found that the FTC’s analysis of different approaches implemented by different states with respect to non-compete agreements was based on specific factual situations and inapposite to the FTC’s categorical ban.  The court further found that the FTC did not adequately address alternatives to issuing the Rule.  In this regard, the FTC “was required to assess whether there were reliance interests, determine whether they were significant, and weigh any such interests against competing policy concerns.” 

     Next, the court examined whether there would be irreparable harm in the absence of an injunction.  To this end, Ryan argued that, if the Rule were to take effect, its non-compete agreements with current and former principals would be invalidated, it would be barred from entering into new agreements with employees, and it would have to inform its workers that their non-compete agreements were no longer valid.  Ryan further argued that such a dynamic would increase the risk of departing employees taking Ryan’s intellectual property to competitors and it would create an “open season” on “poaching” Ryan clients and employees, all of which would require a substantial investment of time and resources to counteract.  The intervenor plaintiffs made similar arguments about businesses across the country.  According to the court, the FTC responded by characterizing the plaintiffs’ injuries as “mere litigation expense” or “self-inflicted injury,” which do not qualify as irreparable harm.  The court noted that “nonrecoverable costs of complying with a putatively invalid regulation typically constitute irreparable harm” and proceeded to describe the Rule’s requirement that agreements would be invalidated and associated notifications would be required to current and former employees regarding the invalidity of non-compete agreements, ultimately leading the court to conclude that implementing the Rule would cause financial and irreparable injury.

     The court then found that failing to issue the injunction would result in “great” injury to both the plaintiffs and public, and concluded that “[g]ranting the preliminary injunction serves the public interest by maintaining the status quo and preventing the substantial economic impact of the Rule, while simultaneously inflicting no harm on the FTC.”  Additionally, the court noted that allowing the Rule to take effect would “make[] unenforceable long-standing contractual agreements that have been judicially recognized as lawful and beneficial to the public interest.”  As a result, the court concluded that the balance of the equities favored granting the injunction and granting the injunction would serve the public interest.

     Although the court found that granting an injunction that bans the implementation and enforcement of the Non-Compete Rule was warranted and it had the authority to issue a nationwide injunction in “appropriate circumstances,” it found that the case did not rise to “appropriate circumstances” to grant nationwide relief and it limited the scope of its injunction only to enforcement and implementation against the plaintiffs.  The court bolstered this conclusion by noting it had standing and redressability concerns.  In this regard, the court noted the plaintiffs offered “virtually no briefing (or basis) that would support ‘universal’ or ‘nationwide’ injunctive relief.”  Additionally, the court found that the plaintiffs “offered no briefing as to how or why nationwide injunctive relief is necessary to provide complete relief to [the] [p]laintiffs, at this preliminary stage” and the intervenor plaintiffs did not support their claim for associational standing on behalf of the member entities they represented.

     The court’s ruling in Ryan is significant in that it stays, at least with respect to those parties that filed suit, the implementation and enforcement of the Non-Compete Rule.  As for all other businesses and individuals around the country who are parties to non-compete agreements or who intend to utilize non-compete agreements, they should consult with their legal counsel regarding the ramifications of the court’s ruling that limited the scope of its injunction only to those parties that filed suit.  This case should continue to be monitored by all parties who have an interest in non-compete agreements, as it is very likely that the government will ultimately appeal the court’s decision.  Also of note is that the court has ordered the parties to file a joint status report by July 9, which might give some insight into the next procedural steps, and the court noted in its opinion that it intends to enter a merits disposition in this case on or before August 30, 2024.