On August 20, 2024, in Ryan LLC, et. al. v. Federal Trade Commission, the United States District Court for the Northern District of Texas issued an Order setting aside the Federal Trade Commission's (“FTC”) Rule banning non-competes (hereinafter “Non-Compete Rule”) entirely. Therefore, the Non-Compete “Rule will not be enforced or otherwise take effect on its effective date of September 4, 2024 or thereafter.”
The Court followed a similar path in reaching its conclusions in this Order as it did when it issued its July 3, 2024 Order in which it issued a temporary and limited injunction on the Non-Compete Rule as to the Plaintiffs.
Once again, the Court examined the legislative history of the Federal Trade Commission Act and concluded that Congress did not empower the FTC to exercise substantive rulemaking for several reasons. First, the law permits the FTC to make only procedural or “housekeeping” rules. Second, if Congress had intended to empower the FTC to exercise substantive rulemaking, then Congress would have outlined sanctions or penalties for violations of the agency's rule. Here, Congress did not. Third, if Congress had intended to bestow substantive rulemaking to the FTC, then Congress would have drafted such a power in a separate and primary placement; it did not.
The Court also examined revisions to the FTC Act. Relying on Sections 6(g) and 18 of the Act, the FTC repeatedly argued that it has the ability to make substantive rules. The FTC also argued that Sections 6(g) and 18 remained untouched during the most recent revisions to the Act. The Court was unconvinced that, writing: “The role of an administrative agency is to do as told by Congress, not to do what the agency thinks it should do.” (citing National Petroleum Refiners Ass'n v. FTC, 482 F.2d 672, 674 (D.C. Cir. 1973)).
Based on its thorough analysis of the context and the structure of the FTC Act, the Court concluded that the FTC exceeded the scope of its statutory authority when issuing the Non-Compete Rule.
Additionally, the Court found that the Non-Compete Rule was “arbitrary and capricious” because “it is unreasonably overbroad without a reasonable explanation.” Also, the FTC failed to consider or discuss alternatives to its “one size fits all” Rule and failed to outline “compelling justifications” for why the FTC did not consider alternatives to the Rule as drafted.
Because the Court concluded that the FTC overstepped its statutory authority with the Non-Compete Rule, and the Non-Compete Rule is arbitrary and capricious, the Court set aside and permanently enjoined the Non-Compete Rule.
The FTC may file an appeal to the Court's August 20th Order. In the meantime, employers can continue to include non-compete provisions in employment and other applicable agreements. All employer obligations (e.g., notice to the employees) under the Non-Compete Rule are also set aside.
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