There are several legal challenges to the Federal Trade Commission’s (FTC) ban on noncompete clauses in employment agreements. There have been multiple lawsuits in varying federal district courts that seek to delay or completely prevent the Final Rule from going into effect. One in particular, filed in the U.S. District Court for the Northern District of Texas—Dallas Division, has successfully stopped the Final Rule from taking effect.[1] In Ryan, the plaintiff, Ryan LLC, and other intervenor plaintiffs including the U.S. Chamber of Commerce, challenged the Final Rule, arguing that it contravenes the authority granted by the FTC Act, is unconstitutional, and is an arbitrary and capricious action. After the plaintiffs succeeded in obtaining a preliminary injunction only as to the named plaintiffs in the suit, the parties filed competing motions for summary judgment to decide the ultimate fate of the Final Rule.
As the Final Rule was set to take effect nationwide on September 4, 2024, on August 20, 2024, the District Court issued its Memorandum Opinion and Order (the “Opinion” or “Mem. Op.”) granting the plaintiffs’ motions and denying the FTC’s motion. Mem. Op. at 1-2. The District Court’s Opinion set aside entirely the Final Rule, preventing it from taking effect nationwide on September 4, 2024, or at any point thereafter. Id. Included in the District Court’s opinion were findings that:
- 15 U.S.C. §46(g)[2] contained no penalty provision for enforcement, indicating a lack of substantive force behind the Final Rule (id. at 18);
- Section 6(g) merely granted the FTC the power to “[f]rom time to time classify corporations[,]” in part because the structure and location of Section 6(g) within the FTC Act indicated that Congress did not grant the FTC substantive rulemaking authority through Section 6(g) (id. at 18-19);
- That the FTC has historically disclaimed substantive rulemaking authority (id. at 19-20) (citing National Petroleum Refiners Ass’n v. FTC, 482 F.2d 672, 693 (D.C. Cir. 1973));
- In the plain language of the FTC Act, 15 U.S.C. § 57a,[3] Congress did not grant the FTC the affirmative rulemaking authority to make substantive rules pertaining to unfair methods of competition (id. at 21-22);
- Under the Administrative Procedures Act,[4] the Final Rule is arbitrary and capricious because:
- the FTC provided no evidence or reasoned basis for imposing such a sweeping prohibition on noncompetes rather than a more targeted approach aimed at harmful noncompetes (id. at 24); and
- the FTC failed to consider—and in fact dismissed entirely—the possibility of a less restrictive alternative to the Final Rule (id.).
As an alternative to the Final Rule being set aside across the entire United States, the FTC sought to have the ruling apply only to the named plaintiffs, as with the preliminary injunction. The District Court found otherwise, ruling that the APA did not “contemplate party-specific relief.” Id. at 26.
The FTC can still appeal the ruling to the U.S. Court of Appeals for the Fifth Circuit, and must do so within 60 days of the Order, which means no later than October 21, 2024. While an appeal has not been filed as of this writing, it would be surprising if the FTC elected not to pursue an appeal. However, an appeal by the FTC may be more difficult in light of the U.S. Supreme Court’s decision in Loper Bright Enters. v. Raimondo, 144 S. Ct. 2244 (2024). In sum, Loper overruled the longstanding precedent set by Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984). Known as “Chevron Deference,” Chevron allowed courts to give significant weight to an agency’s interpretation of its own rules. Without the benefit of Chevron Deference, it remains to be seen whether and how the FTC will attempt to overturn the Ryan decision on appeal.
[1] Ryan, LLC v. FTC, No. 3:24-cv-986-E (N.D. Tex. 2024)
[2] Referred to by the parties and the Court colloquially as “Section 6(g).”
[3] Referred to by the parties and the Court colloquially as “Section 18.”
[4] 5 U.S.C. § 706
RELATED ANALYSIS
- 3 Steps to Prepare for the FTC Noncompete Clause Rule
- FTC Noncompete Rule: How DC, MD, and VA State Laws Are Affected
- FTC Final Rule on Noncompete Clauses: Pending Litigation
Goodell DeVries stands ready to assist in preparing your organization for compliance while ensuring maximum protection of your trade secrets and other confidential and proprietary information. If you have questions about the Noncompete Clause Final Rule or require help in reviewing your organization’s agreements, policies, and other documents, please contact the author, Mike Houde, at mhoude@g
