Not So "Final"? Texas Federal Court Enjoins Enforcement Of FTC's Noncompete Ban, Leaving Future Of Commission's Rule In Doubt

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Sheppard Mullin Richter & Hampton

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On July 3, District Judge Ada Brown of the Northern District of Texas issued an order enjoining the Federal Trade Commission ("FTC") from enforcing its "Final Rule" against plaintiffs Ryan...
United States Antitrust/Competition Law
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On July 3, District Judge Ada Brown of the Northern District of Texas issued an order enjoining the Federal Trade Commission ("FTC") from enforcing its "Final Rule" against plaintiffs Ryan, LLC ("Ryan") and the U.S. Chamber of Commerce (the "Chamber"). If implemented, the Final Rule would effectively render nearly all non-compete agreements unlawful. Accordingly, this opinion was one of the most highly anticipated judicial decisions in antitrust and labor and employment law in recent memory.

Judge Brown declined to issue a nationwide injunction at preliminary injunction stage. So, for now, the order only enjoins the FTC from enforcing its Final Rule against Ryan and the Chamber. But the court will issue a ruling on the merits of plaintiffs' challenge to the Final Rule by August 30—mere days before it is to become effective on September 4. While that ultimate ruling remains uncertain, it unquestionably will have national implications and, if Judge Brown's 33-page opinion is any indicator, the Final Rule's ultimate fate may be grim.

To briefly review, on April 23, 2024, the FTC voted along party lines to issue a Final Rule banning almost all employers from entering or attempting to enter into noncompete agreements with their workers. The Final Rule defined "noncompetes" broadly—such that nearly any type of agreement that penalized or prohibited future, competitive employment would be void. Very narrow exceptions to the ban included restraints in the context of asset purchase agreements and existing—but not future—noncompete obligations between employers and a narrow class of highly paid executives.1

The FTC's authority to issue the Final Rule was the subject of contention from the start—and was challenged vigorously by the two dissenting FTC Commissioners who voted against it in April. Ultimately, the FTC asserted that because noncompetes are "unfair methods of competition under Section 5 of the FTC Act" it had authority to issue the Final Rule pursuant to Section 6(g) of the Act. The Final Rule was published on May 7, 2024, and would become effective September 4.

Almost immediately, legal challenges were filed, including the instant case in the Northern District of Texas—which Ryan filed on April 23. The Chamber joined as an intervenor/plaintiff after its own, later-filed lawsuit in the Eastern District of Texas was stayed. The Ryan case moved quickly and has been the most highly observed by proponents and opponents of the Final Rule alike.

In the lawsuit, Ryan and the Chamber sought an injunction to bar enforcement of the Final Rule. In support thereof, plaintiffs raised various legal challenges to the legality of the Final Rule and the FTC's authority to promulgate it. Plaintiff's claims arose out of the Administrative Procedure Act—which empowers reviewing courts to deem unlawful and set aside various agency actions, findings, or conclusions. 5 U.S.C. § 706(2). Thereunder, plaintiffs contended the FTC: (i) lacked statutory authority to implement the Final Rule; (ii) unconstitutionally exercised power when implementing the Final Rule; and (iii) acted arbitrarily and capriciously when promulgating the Final Rule.

In response, the FTC contended that it had sufficient statutory authority to enact the Final Rule, and properly determined that noncompetes are, in fact, "unfair methods of competition." Further, the FTC argued that Congress delegated authority to the Commission to promulgate the Rule, and that the Rule's tenets are not "arbitrary or capricious."

In every material respect, the district court agreed with plaintiffs. Initially, Judge Brown noted that while the FTC has some authority to promulgate rules, the Commission "lacks the authority to create substantive rules" in the manner it implemented the Final Rule—i.e., via Section 6(g) of the FTC Act. Rather, Judge Brown held, Section 6(g) permits only rules of "agency organization, procedure, or practice" and not "substantive rules" like the Final Rule. Against that backdrop, the district court concluded the plain text of the FTC Act means the Commission "lacks substantive rulemaking authority with respect to unfair methods of competition" and thereby "exceeded its statutory authority" when issuing the Final Rule.

But Judge Brown did not stop there. She also found a "substantial likelihood" that the Final Rule is arbitrary and capricious because it is "unreasonably overbroad". More particularly, Judge Brown held the Final Rule was not supported by a reasonable explanation and implemented a "one-size-fits-all" approach to noncompetes. Notably, the district court was unmoved by the FTC's reliance on studies and surveys—which the Commission cited heavily in support of its Final Rule. Judge Brown stated that the FTC's use of a "handful of studies" was unpersuasive; particularly because those studies served to compare "different states' approaches to enforcing non-competes based on the specific factual situation[.]" By contrast, the FTC's Final Rule is a "sweeping prohibition" and does not target "specific, harmful non-competes". Related, Judge Brown found the FTC failed to sufficiently address or consider "less disruptive" alternatives to the Final Rule. All of this, Judge Brown concluded, rendered the Final Rule arbitrary and capricious.

Against this backdrop, the district court easily found that Plaintiffs had demonstrated a substantial likelihood of success on their claims and that, without an injunction, they would be irreparably harmed. As evidence of harm, Plaintiffs cited damage that would result from invalidating countless noncompete agreements with workers, and the accompanying increased risk of intellectual property and trade secret theft. Additionally, Plaintiffs noted the massive time and expense required to update agreements and otherwise comply with the Final Rule's notice provisions. Judge Brown found that the FTC's opposition to plaintiffs' irreparable harm argument was "scant".

The court also deemed the public interest favored enjoining the Final Rule. Specifically, Judge Brown found that a preliminary injunction would "maintain the status quo" and prevent the "substantial economic impact of the Rule, while simultaneously inflicting no harm on the FTC." The court was persuaded that maintaining the enforceability of lawful contracts—many of which have been in existence for years—is a benefit to the public.

With that, Judge Brown concluded that Plaintiffs had met their burden in seeking injunctive relief. The only remaining question was whether the injunction would apply nationwide, or be limited to the two plaintiffs before the court. In an extremely hollow victory for the FTC, Judge Brown found the preliminary injunction should only cover Ryan and the Chamber. But that limitation may be short lived. The court stated it would issue an ultimate merits ruling "on or before August 30, 2024" after considering more briefing from additional, intervening plaintiffs requesting broader relief. Consequently, the fate of the Final Rule is, at best, uncertain.

For now, the injunction order prohibits the FTC from "implementation of or enforcement of the [FINAL RULE] against [Ryan and the Chamber] from the date of this order to the Court's final adjudication of the merits." The court also stayed the effective date of the Final Rule as to both Ryan and the Chamber.

We will continue to monitor the Ryan case, along with all other pending legal challenges to the Final Rule.

Footnote

1. Sheppard Mullin previously published several pieces on the full scope of the Final Rule that may be found here.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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