As explained in our April 26, 2024, Client Alert, in April, the Federal Trade Commission issued an administrative Rule generally prohibiting most employment-based non-compete agreements. This brought about numerous lawsuits challenging the FTC’s ability to issue the non-compete ban. The first decision was issued on July 3. The court issued a preliminary injunction blocking the new rule, but the injunction only applies to the parties involved in that case. The next decision is expected to be issued on or around July 23, 2024, and may (or may not) include a nationwide halt of the proposed rule, which is set to take effect on September 4, 2024.
On July 3, the Northern District of Texas under Judge Ada Brown issued a preliminary injunction in the case Ryan, LLC v. Financial Trade Commission, but limited the ruling only to the parties involved. The Texas federal court found the FTC likely lacks the statutory authority to ban non-competes, and the FTC’s decision to ban non-competes is likely arbitrary and capricious. As a result, the court barred application of the new non-compete rule against the plaintiffs in Ryan.
In enjoining the FTC rule, the court made several findings by looking into the statutory authority of the FTC. The court found the FTC does not have the power to engage in “substantive rulemaking,” and instead only has the power to issue “housekeeping rules” to prevent unfair methods of competition. In analyzing the FTC’s history, the court also found the FTC had not promulgated substantive rulemaking since 1978, and therefore the plaintiffs in Ryan were likely correct that the FTC’s nationwide non-compete ban exceeds the agency’s powers.
The court also found the rule to be arbitrary and capricious because the FTC provided a “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…” The FTC attempted to rely on studies from individual states banning non-competes, but Judge Brown indicated no state has ever issued a ban as broad as the FTC’s rule.
Finally, the court found the injunction was necessary because if it was not granted, the plaintiffs would have suffered immediate financial injury and nonrecoverable costs. Further, “Granting the preliminary injunction serves the public interest by maintaining the status quo and preventing the substantial economic impact of the Rule, while simultaneously inflicting no harm on the FTC.”
Judge Brown indicated she intends to issue a full ruling for a nationwide injunction on or before August 30, 2024, just days before the FTC rule was set to take effect on September 4, 2024. While this court decision is not binding, it provides the framework for other federal courts to follow suit and will likely influence the outcomes of several other pending lawsuits on the FTC’s rule. One other such lawsuit is ATS Tree Services v. Federal Trade Commission, in the Eastern District of Pennsylvania, with a ruling expected on or before July 23, 2024.
If you have any questions about this Legal Update, please contact:
Attorney Joel S. Aziere, 262-853-0600, jaziere@buelowvetter.com
Attorney Benjamin B. Bauman, 262-364-0264, bbauman@buelowvetter.com
or your Buelow Vetter attorney
