Federal Court Enjoins FTC’s Enforcement of Noncompete Rule; Ryan LLC v. Federal Trade Commission

Introduction

In its July 3, 2024 memorandum opinion and order, the United States District Court for the Northern District of Texas enjoined the Federal Trade Commission (FTC) from enforcing its newly proposed "Non-Compete Rule," citing several critical legal and procedural grounds. This post examines the court's reasoning for granting a preliminary injunction and the factors that led to the determination that the plaintiffs were entitled to relief.

Background of the Case

The case was initiated by Ryan LLC, alongside the Chamber of Commerce of the United States of America, Business Roundtable, Texas Association of Business, and Longview Chamber of Commerce. The plaintiffs collectively challenged the FTC's Non-Compete Rule (16 C.F.R. § 910.1-.6), which made most non-competition agreements unenforceable.

The Court's Reasoning

1. Lack of Statutory Authority:

   • The court found that the FTC overstepped its statutory authority under the Federal Trade Commission Act (FTC Act). Specifically, it concluded that Section 6(g) of the FTC Act, which the FTC cited as its rulemaking authority, does not empower the agency to issue substantive rules on unfair methods of competition.

   • Historically, the FTC has disclaimed such substantive rulemaking power, and the court noted that the Commission's recent reliance on Section 6(g) for this purpose was unfounded. The court emphasized that substantive rulemaking authority typically requires explicit congressional authorization, which was absent in this case.

2. Arbitrary and Capricious Rulemaking:

   • The court determined that the FTC's Non-Compete Rule was arbitrary and capricious, lacking a rational connection between the facts presented and the broad prohibition implemented. The FTC's reliance on various studies was found insufficient to justify the expansive nature of the rule, as no state has adopted such a sweeping ban.

   • Additionally, the FTC failed to consider less disruptive alternatives or adequately address the positive aspects of non-compete agreements. This oversight further contributed to the rule being deemed arbitrary and capricious.

3. Procedural Flaws:

   • The court highlighted procedural deficiencies in the FTC's decision-making process, noting that the Commission did not sufficiently weigh the reliance interests of businesses and workers who benefit from non-compete agreements. The FTC's failure to provide a reasonable explanation for dismissing alternative regulatory approaches was a significant factor in the court's decision.

Reasons for Plaintiff Relief

1. Irreparable Harm:

   • The plaintiffs successfully demonstrated that the enforcement of the Non-Compete Rule would cause irreparable harm, particularly through the invalidation of existing non-compete agreements and the prohibition on future agreements. This would expose businesses to significant risks, such as the loss of proprietary information and competitive disadvantage.

   • The financial and operational disruptions associated with compliance, including notifying employees and restructuring contracts, were deemed irreparable injuries that could not be adequately remedied by monetary compensation alone.

2. Public Interest:

   • The court found that the balance of equities and public interest weighed in favor of the plaintiffs. It reasoned that the broad application of the rule without sufficient justification could harm businesses and the overall economy more than it would benefit workers.

   • The court underscored the importance of maintaining stability in the regulatory environment, particularly given the historical context of state-level regulation of non-compete agreements.

Conclusion

The court's decision to enjoin the FTC from enforcing the Non-Compete Rule underscores the importance of clear statutory authority and rational, evidence-based rulemaking processes. By granting the preliminary injunction, the court aims to preserve the status quo while it evaluates the merits of the case in greater detail. This ruling provides significant relief to businesses that rely on non-compete agreements to protect their competitive interests and maintain operational stability.

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