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As you may recall, on April 23, 2024, the FTC announced its Final Rule to ban non-compete clauses. The Final Rule was set to become effective September 4, 2024. The Final Rule would prohibit an employer from entering into, or attempting to enter into, a non-compete clause with a “worker” (including, e.g., employees and independent contractors) or representing that a worker is subject to a non-compete clause.
There have been numerous challenges to the Final Rule since its issuance in April. On July 3, 2024, the U.S. District Court for the Northern District of Texas in Ryan, LLC v. Federal Trade Commission, Civil Action No. 3:24-CV-00986-E, issued a limited stay and preliminary injunction of the Federal Trade Commission's Final Rule that would render almost all non-compete agreements, with very limited exceptions, unenforceable. The court limited the injunction to enforcement of the Final Rule against the named and intervenor plaintiffs in the action.
Yesterday, on August 20, 2024, the Honorable Ada E. Brown, U.S. District Court Judge for the Northern District of Texas, struck down the FTC’s ban on non-compete agreements. In her 27-page Order, Judge Brown instructed that the FTC’s rule, being arbitrary and capricious and outside the FTC’s authority, shall “not be enforced or otherwise take effect on its effective date of September 4, 2024 or thereafter.” Judge Brown’s ruling applies to businesses and employers nationwide, while the initial stay and limited injunction only applied to the parties in the case.
In reviewing the FTC’s rulemaking, the court focused on the FTC’s claimed statutory authority for promulgating the ban on non-compete agreements, 15 U.S.C. § 46(g) and 15 U.S.C. § 57a. However, Judge Brown found that the plain language of 15 U.S.C. § 46(g), “to make rules and regulations for the purpose of carrying out the provisions of this subchapter”, only provided for procedural rules rather than substantive rules. The court also noted that the lack of a statutory penalty for violating 15 U.S.C. § 46(g) was an indicator that this section only encompassed procedural or “housekeeping” rules, rather than substantive. Similarly, 15 U.S.C. § 57(a) limits the FTC’s ability to make rules dealing with unfair or deceptive practices—not unfair methods of competition. Although this section of the FTC Act does give the FTC some rulemaking power in the realm of unfair methods of competition in or affecting commerce, the court reviewed the text and history of the FTC Act and found that the FTC had no authority to create substantive rules using these sections.
Judge Brown then focused her analysis on the arbitrary and capricious nature of the FTC’s rule. The rule banning non-competes, according to Judge Brown, was “unreasonably overboard” as it imposes a “one-size-fits-all approach with no end date” that was not supported by the record in promulgating the rule. The FTC relied on a handful of studies that examined different states’ approach to non-compete agreements. However, these approaches are based on different factual situations, which would have supported targeting harmful and specific non-compete agreements. Instead, the FTC imposed a sweeping ban on non-compete agreements without any evidence as to why.
It is likely that appeals will follow and eventually make their way to the Supreme Court, who will ultimately decide if the Final Rule is within the bounds of the FTC’s rulemaking authority. While many think that the FTC’s rule is unlawful, there is no way to know for certain until the Supreme Court decides the issue. Stay tuned with updates from Chartwell Law for news relating to the FTC’s rule and other important employment law updates.
