A U.S. District Court judge in Texas has set aside the Federal Trade Commission's (FTC) controversial noncompete rule, ruling that it will not become effective on Sept. 4 as previously scheduled and cannot be enforced by the FTC. The case is Ryan vs. Federal Trade Commission.
Decision Details
The FTC's regulation seeking to prohibit noncompetition agreements between employers and employees, adopted in April in a 3-2 partisan vote (with the chair providing the swing vote), represented just the second time in the FTC's 109-year history that it sought to confront unfair competition through a rule making process. The FTC has argued that certain passages of the FTC Act and the Magnuson-Moss Act provide it with authority to regulate unfair competition. The plaintiff and intervenors (including the U.S. Chamber of Commerce) in the Texas case disputed the agency's reasoning, claiming that the FTC lacked the authority under those statutes and is an example of government overreach, among others.
Echoing many of the same findings in her order granting the plaintiff's motion for preliminary injunction, which we previously wrote about, Judge Ada Brown of the Northern District of Texas held that the FTC exceeded its authority, and that even if it had proper authority, its rulemaking had been arbitrary and capricious. The court found that Congress did not give the FTC substantive rulemaking authority related to unfair methods of competition, and that contrary to the FTC's arguments otherwise, the Magnuson-Moss Act likewise did not imbue the commission with the power to promulgate substantive rules regarding unfair methods of competition. Therefore, the court concluded the FTC exceeded its congressional authority in adopting the noncompete rule.
The court further held the noncompete rule to be arbitrary and capricious, imposing "a one-size-fits-all approach with no end date, which fail[ed] to establish a rational connection between the facts found and the choice made." Judge Brown observed the commission had not justified a categorical ban on noncompete clauses when other alternatives (such as the targeting of specific, harmful noncompetes by the FTC) had not been fully considered by the FTC.
The judge set aside the noncompete rule pursuant to section 706(2) of the Administrative Procedures Act (as opposed to issuing a nationwide injunction). Interestingly, while this remedy is commonly referred to as the APA's "vacatur" remedy, the court explicitly rejected that terminology, opting instead to hew to the plain language of section 706(2) that certain unlawful agency actions may be "set aside."
Next Steps
Similar challenges to the noncompete rule are pending in the Eastern District of Pennsylvania and Middle District of Florida, with the former court refusing to temporarily enjoin the noncompete rule last month and the latter aligning with the Texas court on the question of emergency relief only last week. Since the Ryan judgment was entered, the FTC has requested a suspension of the briefing deadlines in the Florida matter for the express purpose of considering whether to appeal the Florida court's order and the Ryan decision.
Should the FTC press its luck in the Eastern District of Pennsylvania or opt to appeal, the lawfulness of the FTC's noncompete rule will likely proceed through the United States' courts of appeals. What is certain is that, for now, businesses can rest easy that they will not have to comply with the rule come Sept. 4.
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