The Federal Trade Commission's ("FTC") recently announced non-compete ban, set to become effective on September 4, 2024, has raised significant concerns among numerous businesses and industry groups since its announcement. On July 3, 2024, a Texas federal judge issued an order that should give them hope that the ban ultimately will be overturned. Judge Ada Brown of the United States District Court for the Northern District of Texas entered a preliminary injunction blocking the FTC from implementing or enforcing the ban against the plaintiffs in the case before the court.
The preliminary injunction stays the September 4 effective date of the non-compete ban for the plaintiffs and will be effective from July 3, 2024 until the court's final adjudication on the merits. Judge Brown wrote in the order that this final adjudication should occur on or before August 30, 2024. While the preliminary injunction is limited to cover only plaintiffs Ryan LLC, Chamber of Commerce of the United States of America, Business Roundtable, Texas Association of Business, and Longview Chamber of Commerce, Judge Brown's written opinion provides reasoning indicating that the ban ultimately will be struck down.
Overall, the court concluded that "the text, structure, and history of the FTC Act reveal that the FTC lacks substantive rulemaking authority with respect to unfair methods of competition under Section 6(g)." The court observed that "[s]tates have historically regulated non-competes through caselaw and statute" and that the FTC's non-compete ban "supersedes state laws that would 'permit or authorize' non-compete agreements." The court reasoned that agencies like the FTC have only the powers that Congress grants them. The court then opined that "the Commission has exceeded its statutory authority in promulgating the Non-Compete Rule."
Further, in evaluating the non-compete ban under the Administrative Procedure Act's ("APA") arbitrary and capricious standard, the court found that "there is a substantial likelihood the Rule is arbitrary and capricious because it is unreasonably overbroad without a reasonable explanation."
In its opinion, the court quoted the U.S. Supreme Court's recent pivotal ruling overturning Chevron deference in Loper Bright Enterprises v. Raimondo, No. 22-1219, 2024 WL 3208360, at *14 (U.S. June 28, 2024) for the proposition that "[t]he deference that Chevron requires of courts reviewing agency action cannot be squared with the APA."
While the Texas court's ruling is indeed positive news for businesses and industry groups concerned about the non-compete ban, it is important to remember that it applies only to the plaintiffs in that case. The court declined to extend injunctive relief to members of the business association plaintiffs because associational standing had not yet been briefed. Accordingly, everyone other than the named plaintiffs must remain watchful of further court action before the ban is set to take effect on September 4.
Originally published 10 July 2024
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.