“No More Non-Competes,” Part Three: Texas Judge Issues Limited Order Partially Blocking FTC Noncompete Rule

On July 3, 2024, in Ryan, LLC v. Federal Trade Commission Case (No. 3:24-cv-00986), Northern District of Texas Judge Ada Brown issued an order granting the motions for a stay of the effective date of the FTC Rule, and a preliminary injunction with respect to implementation or enforcement of the FTC Rule filed by the Plaintiff and Plaintiff-Intervenors in that case (collectively, “Plaintiffs”), but only as to the Plaintiffs. Judge Brown declined to extend the stay and injunctive relief on a nationwide basis.  Accordingly, for now, as to the Plaintiffs, the effective date of the FTC Rule is stayed and the FTC is wholly enjoined from implementation of or enforcement of the FTC Rule against the Plaintiffs.

While the limited scope of the injunctive relief may come as a disappointment to employers who oppose the FTC Rule, much of Judge Brown’s analysis in the Order should, to some degree, ease concerns as we await a final ruling.  Significantly, in granting the motions, the Judge concluded that Plaintiffs are likely to succeed on the merits that the FTC Rule is unlawful because (1) the FTC lacks statutory authority to promulgate the FTC Rule, and (2) it is arbitrary and capricious.

Judge Brown also noted her intention to rule on the ultimate merits of the lawsuit on or before August 30, 2024.  Therefore, unless the FTC presents new arguments and evidence in support of its position that it had authority to engage in substantive rulemaking and the FTC rule is not arbitrary and capricious, the Court may block the FTC Rule prior to its effective date.  Regardless of the outcome, we expect Judge Brown’s ultimate ruling to be appealed to the Fifth Circuit Court of Appeals.

Case History

On the same day the FTC issued its final rule, tax services company Ryan, LLC (“Ryan”) filed suit in the Northern District of Texas against the FTC alleging the FTC Rule was unlawful.  One day later, on April 24, the U.S. Chamber of Commerce filed a similar lawsuit in the Eastern District of Texas, along with a motion for stay of the effective date of the FTC Rule and for preliminary injunction (Chamber of Commerce of the United States of America, et al. v. Federal Trade Commission, Case No. 6:24-cv-00148).  Yet another day later, on April 25, a third lawsuit was filed by ATS Tree Services, LLC (“ATS”) seeking similar relief in the Eastern District of Pennsylvania. (ATS Tree Services, LLC v. Federal Trade Commission, et al., Case No. 2:24-cv-01743).  Each lawsuit challenged the rule and the FTC’s authority to promulgate it.  Judge Kelley B. Hodge has indicated she will rule on ATS’ stay request by July 23, 2024.  All three lawsuits present similar arguments in opposition to the FTC Rule.

On May 3, 2024, given that Ryan filed its challenge first and the two lawsuits seek the same relief, Judge J. Campbell Barker suspended the U.S. Chamber of Commerce’s lawsuit based on the first-to-file doctrine.  Shortly thereafter, Judge Brown granted the request of the U.S. Chamber of Commerce, Business Roundtable, Texas Association of Business, and Longview Chamber of Commerce (collectively, “Chamber”) to intervene as plaintiffs in the Ryan lawsuit.  Together, in seeking a stay and injunction of the FTC Rule, Ryan and the Chamber alleged the FTC Rule is unlawful and adverse to public policy interests, and that the rule should not be implemented.

The Arguments

In summary, the Plaintiffs argued (among other things):

• Section 6(g) of the FTC Act does not grant the FTC substantive rulemaking power for preventing unfair methods of competition. Instead, Section 6(g) empowers the FTC only to develop internal rules to govern how it conducts investigations and carries out its functions, not to promulgate substantive rules that bind private parties and declare common business practices categorically unlawful.
• The FTC’s attempt to designate all noncompete agreements as “unfair methods of competition” is contrary to Section 5 of the FTC Act, and thus exceeds the FTC’s authority under that provision.
• The FTC Rule is arbitrary and capricious due to the FTC’s (1) failure to engage in reasoned decision-making and (2) failure to consider alternative proposals.

In response, the FTC asserted (among other things):

• The history of statutory interpretation and legislative action supports the FTC’s position that Section 6(g) of the FTC Act grants it the authority to regulate unfair methods of competition. The FTC has not exceeded its area of expertise with the FTC Rule.
• Nothing requires the FTC to review noncompetes on a case-by-case basis. The FTC can regulate, and prohibit, noncompetes as a whole.
• The FTC did not act in an arbitrary and capricious manner given its studies on noncompetes and related economic analysis.

The Ryan Ruling

Following review of the arguments made by Plaintiffs and additional parties who filed briefs in support of either Plaintiffs or the FTC, Judge Brown, without a hearing, determined the Plaintiffs established all elements necessary to obtain a preliminary injunction: (1) a substantial likelihood of success on the merits; (2) a substantial threat of irreparable harm in the absence of preliminary relief; (3) that the balance of equities tips in the movants’ favor; and (4) that the injunction serves the public interest.

The FTC Lacks Substantive Rulemaking Authority

As to the FTC’s rulemaking authority, Judge Brown noted that Section 5 of the FTC Act creates a comprehensive scheme to prevent unfair methods of competition, while Section 6 of the FTC Act enumerates additional powers that generally aid in the administration of that adjudication-focused scheme.  The Judge determined that, based on the text, structure, and history of the FTC Act, the FTC lacks authority to create substantive rules regarding unfair methods of competition, describing that Section 6(g) is “indeed a ‘housekeeping statute,’ authorizing what the A[dministrative] P[rocedure] A[ct] terms ‘rules of agency organization procedure or practice’ as opposed to ‘substantive rules.’”

Notably, Judge Brown’s Order cited the Supreme Court’s June 28^th decision in Loper Bright Enterprises v. Raimondo, No 22.1219, 2024 WL 3208360 (U.S. June 28, 2024) in emphasizing that Chevron deference was no longer appropriate in reviewing the FTC’s rule and its interpretation of the FTC Act.  In examining the FTC Act’s text and history, Judge Brown concluded that “[b]y a plain reading, Section 6(g) of the Act does not expressly grant the Commission authority to promulgate substantive rules regarding unfair methods of competition.”

Judge Brown arrived at this conclusion based on several theories.  For example, she noted that—unlike Section 5 adjudications, which include a penalty provision—Section 6(g) of the FTC Act contains no penalty provision, indicating a lack of substantive force. The Court’s Order emphasized that “the lack of a penalty included with Section 6(g) supports that such provision encompasses only housekeeping rules—not substantive rulemaking power.”  It also held that the structure and the location of Section 6(g) within the FTC Act as a whole demonstrate that Congress did not explicitly give the FTC substantive rulemaking authority under Section 6(g).

Looking to history, Judge Brown noted that from 1978 until this FTC Rule, the FTC did not promulgate a single substantive rule under Section 6(g).  She further pointed to 1967 and 1968 amendments to the FTC Act, opining that, if Section 6(g) had already given the FTC substantive rulemaking power, these amendments would have been superfluous.

The FTC Rule is Arbitrary and Capricious

Judge Brown next turned to Plaintiffs’ assertions that the FTC Rule must be set aside because it is arbitrary and capricious.  The Order points out that an administrative agency’s actions are constrained by the standard set out in the Administrative Procedure Act, and a court must hold unlawful agency actions that are “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.”  Judge Brown then concluded that the FTC Rule was, in fact, arbitrary and capricious because: (1) it is unreasonably overbroad without a reasonable explanation, imposing “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,’” and (2) the FTC insufficiently addressed alternatives to issuing the FTC Rule.  The Order points out that the FTC failed to proffer evidence as to why they chose to impose a sweeping prohibition that prohibits entering or enforcing virtually all non-competes rather than targeting specific, harmful non-competes.  Judge Brown further concluded the FTC “dismissed any possible alternatives, merely concluding that either the pro-competitive justifications outweighed the harms, or that employers had other avenues to protect their interests.”

In emphasizing the Court’s opinion that the rule is arbitrary and capricious, the Order emphasized: “the [FTC] Rule is based on inconsistent and flawed empirical evidence, fails to consider the positive benefits of non-compete agreements, and disregards the substantial body of evidence supporting these agreements.”

Relief Limited to Named Plaintiff and Plaintiff Intervenors

Despite the conclusion that Plaintiffs will ultimately succeed in convincing the Court that the FTC Rule is unlawful, Judge Brown declined to issue a nationwide injunction, noting that the Plaintiffs failed to offer any briefing as to how or why nationwide preliminary injunctive relief is necessary to provide complete relief to the Plaintiffs themselves.  She also declined to extend the relief to even the members of the various Plaintiff Intervenor associations, based on the fact that they failed to seek associational standing on behalf of their respective member entities.

Looking Ahead

Unfortunately for employers who oppose the FTC Rule, this Order fails to provide immediate answers as to the FTC Rule’s effectiveness as of September 4, 2024.  As it stands, the FTC Rule will take effect on such date against employers other than the Plaintiffs.  Likewise, even as to the Plaintiffs, the Order does not preclude the FTC from taking enforcement actions against noncompete agreements on a case-by-case basis.

However, if Judge Brown’s Order is a window into her ultimate ruling in the Ryan v. FTC lawsuit, it is reasonable to conclude that by August 30, 2024, the FTC Rule will no longer be set to take full effect and there will be precedent that other employers may look to in challenging the Rule.  In such case, the ultimate ruling on the merits may (1) issue some form of permanent injunction or (2) vacate the FTC Rule in its entirety.  Again, regardless of outcome, we anticipate additional legal challenges coming before the Fifth Circuit, and potentially the Supreme Court.

Court watchers should also continue to monitor the ATS lawsuit proceeding in Pennsylvania, which may provide additional insight on the enforceability of the FTC Rule by the end of July.