Northern District of Texas Permanently Blocks FTC’s Ban on Non-Competes Nationwide

Plaintiffs battling the Federal Trade Commission’s ban on non-compete clauses in employment agreements notched a significant victory recently.  On August 20, 2024, U.S. District for the Northern District of Texas Judge Ada Brown permanently blocked the agency’s action in Ryan LLC v. Federal Trade Commission, concluding the rulemaking exceeded the agency’s statutory authority.  Judge Brown had previously granted a preliminary injunction that limited its effect to the plaintiffs in the case.  Yesterday’s ruling, however, which granted the plaintiffs’ summary judgment motion, permanently blocks the ban nationwide.

The Texas court’s decision comes just weeks before the FTC’s rule was scheduled to take effect, on September 4, and days after a Florida federal court became the second court in the nation to rule that the FTC lacked the authority to issue the non-compete ban.  The FTC is likely to appeal the Texas court’s decision, which remains at odds with a decision in the Eastern District of Pennsylvania earlier this month that upheld the rule.  Should these dueling decisions be affirmed on appeal, there will be a federal circuit split, increasing the likelihood of the U.S. Supreme Court ultimately deciding the issue.

For more information on prior court rulings on the FTC’s non-compete rule, please see Crowell’s earlier alerts:

• Texas Federal Court Preliminarily Enjoins FTC’s Non-Compete Ban, But Declines to Issue Nationwide Preliminary Injunction, July 8, 2024
• Diverging from Texas Federal Court’s Preliminary Ruling, Pennsylvania Federal Court Declines to Enjoin FTC’s Rule Banning Non-Compete Agreements, July 25, 2024

The Texas Court’s Latest Decision

All parties—the FTC and the plaintiffs (Ryan and the associations that intervened in the matter)— cross-moved for summary judgment, mimicking many of the arguments from the preliminary injunction stage, but with additional focus on the proper remedy.

Plaintiff Ryan argued that the FTC violated the Administrative Procedure Act (“APA”) with its ban on non-competes because: (1) it lacked the authority to promulgate the rule; (2) even if it had authority to issue the rule, this was in violation of the non-delegation doctrine; (3) the rule is unlawfully retroactive; (4) the FTC was arbitrary and capricious; and (5) the FTC is “unconstitutionally insulated from presidential control.”

The associations that intervened in the action—U.S. Chamber of Commerce, Business Roundtable, Texas Associate of Business, and Longview Chamber of Commerce—also argued that: (1) the FTC Act does not authorize substantive unfair competition rules; (2) the categorical prohibition on all non-compete agreements exceeds the meaning of the phrase “unfair methods of competition” in Section 5 of the FTC Act; and (3) the FTC does not have the statutory authority to “retroactively invalidate millions of existing contracts.”

The Court focused on two arguments: (1) that the FTC exceeded its statutory authority by promulgating this ban; and (2) that the rule is “arbitrary and capricious.”

The FTC Exceeded Its Statutory Authority

As the legal basis for its non-compete rule, the FTC relied on its authority in Section 6(g) of the FTC Act, which grants “[a]dditional powers” to implement Section 5, which “prohibits unfair or deceptive acts or practices in or affecting commerce.”  Judge Brown agreed with the plaintiffs that this Section “does not authorize substantive rulemaking,” including the ban on non-competes.  In particular, Judge Brown found it illuminating that Section 6 of the FTC Act does not prescribe any sanctions or statutory penalty for violating rules promulgated under that section, suggesting an authority to issue only “housekeeping rules,” which the ban on non-competes decidedly is not.  Without an explicit grant of authority from Congress, Judge Brown concluded, she would not infer substantive rulemaking authority.

The Rule is “Arbitrary and Capricious”

Judge Brown also found the rulemaking was “arbitrary and capricious” because it was “unreasonably overbroad without a reasonable explanation.”  In line with concerns raised by many when the rule was promulgated, Judge Brown took issue with the rule’s “one-size-fits all approach with no end date.” While the FTC relied on studies of state-level regulation of non-compete agreements, no state had enacted as broad a restriction as the FTC’s ban on nearly all non-competes.  According to Judge Brown, the FTC could not adequately explain why it instead chose a sweeping prohibition over a more targeted approach aimed at the most harmful non-compete agreements.

An additional concern was that the FTC did not sufficiently address whether there were less disruptive alternatives that it could have pursued.

The Remedy

Given the limited scope of her preliminary injunction, the remedy is perhaps the most critical point of Judge Brown’s decision.

The text of the APA, Judge Brown explained, requires courts to “hold unlawful and set aside” arbitrary and capricious rulemaking.  The FTC focused on the Court’s prior, narrow ruling, and argued that any relief should be limited, again, to just the plaintiffs in the action.  Judge Brown disagreed, because setting aside agency action under the APA has nationwide effect.

What’s next?

Judge Brown’s decision in likely to be challenged on appeal, but as of now, the ban on non-competes will no longer go into effect on September 4.  A key question will be how this recent decision is squared with the earlier decision out of Pennsylvania, where the court found the FTC did have statutory authority to promulgate the noncompete rule.

In the meantime, companies that rely on non-compete agreements should continue to assess the legal risks of enforcing them, as the legal issues surrounding the FTC’s rule work their way through the appellate process.  However, the immediate impact—from the impending September 4 deadline—has eased.

Beyond this ruling, the decision is an early application of the recent Supreme Court decision, Loper Bright Enterprises v. Raimondo, which overturned the doctrine of deference to agency decisions. It is clear that the Supreme Court’s ruling played a role in Judge Brown’s understanding of the APA and the scope of judicial review of agency action.