On July 3, 2024, the United States District Court of the Northern District of Texas granted a preliminary injunction barring the Federal Trade Commission from enforcing its rule against non-compete agreements (“Rule”).
Ryan LLC v. FTC, No. 3:24-cv-00986-E, 2024 WL 3297524 (N.D. Tex. July 3, 2024) (“Opinion”). The Court did not issue a nationwide injunction, extending relief only to plaintiff and plaintiff-intervenors (collectively, “Plaintiffs”).
The Court concluded that the FTC exceeded its statutory authority in promulgating the Rule, which prohibits new non-compete agreements and releases most workers from existing restrictions. Opinion at 6, 19. The FTC estimates that 30 million U.S. workers are subject to these agreements, which—in states that allow their enforcement—prohibit employees from competing against their employers. Opinion at 4. The Rule remains set to go into effect on September 4, 2024.
The Court’s decision turned on its interpretation of Section 6(g) of the FTC Act, which grants the FTC the power “to make rules and regulations.” 15 U.S.C. § 46(g). The FTC argued that this allowed it to issue rules to enforce Section 5 of the FTC Act, which empowers it to prevent “unfair methods of competition.” 15 U.S.C. § 45(a)(2). The Court agreed but concluded that Section 6(g) was a “housekeeping statute” that authorized only rules related to agency procedure and not “substantive rules” like the non-compete ban. Opinion at 15. Because Congress normally includes penalty provisions when it authorizes legislative rulemaking, the Court reasoned that Section 6(g)—which does not contain a penalty provision—is not an explicit delegation of substantive rulemaking authority. Opinion at 15-17.
The Court also considered Section 6(g)’s history. The FTC had relied on Section 6(g) to issue substantive rules from 1962 to 1978, and the D.C. Circuit expressly approved this rulemaking authority in
National Petroleum Refiners Ass’n v. FTC, 482 F.2d 672 (D.C. Cir. 1973). But the Court believed that amendments to the FTC Act in 1960s and 1970s, which expressly empowered the FTC to make substantive rules specifically “with respect to unfair or deceptive acts or practices,” would have been superfluous if the Section 6(g) already contained this authority. Accordingly, the Court concluded that Congress had vested the FTC “with the power to promulgate substantive rules regarding
only unfair or deceptive acts or practices,
not unfair methods of competition.” Opinion at 18.
Separately, the Court found that the Rule was “arbitrary and capricious” under the Administrative Procedure Act because of its breadth. Opinion at 23. The FTC had studied states’ restrictions on non-compete agreements, but because states had not enacted bans as broad as the Rule, the evidence gathered from these studies did not warrant the “expansive ban” the Rule sought to impose. Opinion at 21. Further, the Court determined the FTC did not sufficiently address alternatives to the Rule. Opinion at 22.
Because the Court found the Rule was arbitrary and capricious and exceeded the FTC’s rulemaking authority, the Court held that Plaintiffs had a substantial likelihood of success on the merits. Opinion at 23. The Court determined that Plaintiffs would suffer irreparable harm because compliance with the Rule would cause financial injury. Plaintiffs had argued that their employees would likely leave. Opinion at 26-27. Finally, the Court found a public interest in “maintaining the status quo and preventing the substantial economic impact of the Rule.” Opinion at 28. Accordingly, the Court determined that Plaintiffs had met the standard for a preliminary injunction but declined to issue a nationwide injunction. Opinion at 28-31.
After the Court issued the Opinion, Plaintiffs requested that the Court expand the injunction’s scope to plaintiff-intervenors’ members, including businesses that are members of the Business Roundtable and the U.S. Chamber of Commerce. ECF Nos. 157, 159. On July 11, the Court denied Plaintiffs’ request. Order, ECF No. 161.
The Court plans to issue a final opinion by August 30, five days before the Rule is scheduled to go into effect. Opinion at 32. The Court can still issue a nationwide injunction. If it does, the FTC would face an uphill battle in reversing the ruling, as the Fifth Circuit would first hear any appeal. Separately, the FTC will likely also face difficulty because, after the recent Supreme Court decision striking down
Chevron deference, courts are no longer obligated to defer to the FTC’s interpretation of its statute. For more information about the Supreme Court’s recent
Chevron deference opinion, please see the litigation newsletter
here.
