On August 20, 2024, the Northern District of Texas in Ryan LLC v. Federal Trade Commission issued a nationwide order preventing the Federal Trade Commission's (FTC) Non-Compete Rule from going into effect on September 4, 2024. Had the rule become effective, it would have prohibited most employers across the United States from entering into non-competition agreements with their employees. It also would have required employers to notify current and former employees that their non-compete agreements with the employer are unenforceable. But after the Northern District of Texas set aside the FTC's Non-Compete Rule, employers are not required to comply with these requirements for the time being.
The Northern District of Texas Court's Ruling in Ryan LLC v. Federal Trade Commission
In Ryan LLC v. Federal Trade Commission, a group of Texas and national organizations sued the FTC to invalidate the FTC's Non-Compete Rule in April 2024. Their arguments for invalidating the rule essentially focused on two issues: (1) whether the FTC lacked statutory authority to promulgate the Rule; and (2) whether the Rule was arbitrary and capricious under the Administrative Procedures Act (APA). The Texas federal court agreed with the plaintiffs on both issues for the following reasons.
First, based on the text and structure of the FTC Act, the court concluded that “the Act does not expressly grant the [FTC] authority to promulgate substantive rules regarding unfair methods of competition.” In particular, the court found that Section 6(g) of the FTC Act, which was the section the FTC relied upon to issue its Rule, was merely a “housekeeping statute” about rules of agency organization that did not provide substantive rulemaking power. Because this section did not give the FTC the power to make substantive rules regarding unfair competition, the court held the FTC lacked authority to issue the Non-Compete Rule.
Second, the court also held that the Non-Compete Rule was arbitrary and capricious under the APA. The APA requires courts to ensure an agency considered the relevant issues and reasonably explained its decision for taking an administrative action. If so, then the court should not substitute its own policy judgement for the agency's. However, if the agency relied on factors that Congress did not intend it to consider, failed to consider an important issue, offered an explanation for its decision that was inconsistent with the evidence, or proffered a conclusion so implausible that it could not be linked to the product of agency expertise, then courts have a valid basis for finding the action arbitrary and capricious under the APA.
Here, the court concluded the Non-Compete Rule is arbitrary and capricious for several reasons. For example, the court believed the Rule, “impose[d] a one-size-fits-all approach with no end date, which fails to establish a rational connection between the facts found and the choice made.” The court also emphasized the FTC's “lack of evidence as to why they chose to impose such a sweeping prohibition—that prohibits entering or enforcing virtually all non-competes—instead of targeting specific, harmful non-competes.” Finally, the court found that the FTC's failed to address alternatives to implementing the Rule.
What's Next for Employers?
Because the Northern District of Texas ruled the FTC lacked the authority to create the rule, and that as drafted it was arbitrary and capricious, the court issued a nationwide order finding the Non-Compete Rule unlawful. Accordingly, the Rule will not become effective on September 4, 2024.
But this may not be the end for the FTC's Non-Compete Rule. The court's opinion not only critiqued the FTC's rulemaking process for the Non-Compete Rule, but it also attacked the FTC's power to create substantive rules to regulate methods of unfair competition. So, unsurprisingly, the FTC immediately stated that it is considering a potential appeal to the United States Court of Appeals for the Fifth Circuit. The FTC has also stated that it may still address enforceability of non-compete agreements through case-by-case enforcement actions. Thus, employers should still keep a watchful eye out as this saga enters a new chapter.
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