Texas Federal Court Preliminarily Enjoins FTC’s Non-Compete Ban, But Declines to Issue Nationwide Preliminary Injunction

On July 3, 2024, Judge Ada Brown of the U.S. District Court for the Northern District of Texas temporarily blocked the Federal Trade Commission (“FTC”) from enforcing its recent rule banning virtually all employee non-compete agreements in the United States.  In its 33-page opinion, the court ruled that the plaintiffs are likely to succeed on the merits of their claims that the FTC lacks statutory authority to issue its non-compete ban via rulemaking and that the FTC’s decision to ban non-competes broadly was arbitrary and capricious. However, in a surprise twist, the court declined to grant nationwide preliminary relief, opting instead to limit its injunction to the specific plaintiffs in the action.  The court indicated that it intends to issue a final ruling by August 30, 2024—days before the non-compete ban is scheduled to take effect on September 4.

Although the court limited the preliminary injunction to the specific plaintiffs, the decision represents a significant first win for opponents of the FTC’s ban, and provides a blueprint for how the court will likely decide the ultimate fate of the rulemaking in its upcoming final decision.  Moreover, while not binding and subject to appeal, the decision could influence how a Pennsylvania federal court decides a separate pending challenge to the FTC’s non-compete ban.  

The Ryan Decision

Ryan LLC v. Federal Trade Commission was filed just hours after the FTC voted for final approval of its rule banning non-compete agreements on April 23, 2024.  Given the unprecedented breadth of the FTC’s proposed rule earlier (and its final configuration), it was long expected that the rule would be immediately challenged by various industry groups on constitutional and other legal grounds.^[1]   For more information on the FTC’s rule, see Crowell’s earlier alert, FTC Issues Final Rule Banning Most Non-Compete Agreements.  

In preliminary injunction proceedings, courts must consider the likelihood of success on the merits of the plaintiffs’ claim, the irreparable harm that would ensue unless enjoined, and the balance of the equities and public interest.  In the Ryan case, the court held that the plaintiffs satisfied all three requirements. With respect to the first requirement, the court found that the plaintiffs established a likelihood of success on the merits in two of their key arguments challenging the ban: (1) that the FTC lacks the statutory authority to issue rules defining unfair methods of competition, and (2) that the FTC’s action was “arbitrary and capricious” under the Administrative Procedure Act (“APA”), 5 U.S.C. §§ 551–559. 

To assess the scope of the FTC’s statutory authority, the court took a deep dive into the text of the Federal Trade Commission Act (“FTC Act”) and the history of the FTC itself.  The court considered the FTC’s argument that Sections 5 and 6(g) of the FTC Act empowered it to promulgate rules that prevent unfair methods of competition.  While acknowledging that Section 5 gives the agency authority to prevent unfair methods of competition, the court agreed with the plaintiffs that Section 6(g) does not authorize the FTC to engage in “substantive rulemaking,” but only gives the Commission the power to issue “housekeeping rules” to carry out its mandate to prevent unfair methods of competition.  Specifically, the court noted that “Congress did not explicitly give the [FTC] substantive rulemaking authority” relating to unfair methods of competition under the FTC Act.  The court pointed to the FTC’s history, including that (1) for nearly 50 years from its formation, the FTC had explicitly disclaimed having such substantive rulemaking authority, and (2) that until April 2024, the agency had not promulgated substantive rulemaking under FTC Act 6(g) since 1978.  Accordingly, the plaintiffs established that the FTC’s nationwide ban likely exceeds the agency’s “housekeeping” authority under Section 6(g).

The court further concluded that the FTC’s actions were not authorized by the APA, because there was a substantial likelihood that the ban is arbitrary and capricious due to its overbreadth.  The court explained that the FTC’s rulemaking record did not support the decision to adopt a “one-size-fits-all approach with no end date,” while discounting a whole slew of alternatives to the near-total ban on non-compete agreements.  Because the court found that the agency had overstepped its statutory authority and that its rulemaking was arbitrary and capricious, it declined to consider the plaintiffs’ additional argument that the ban is an unconstitutional exercise of administrative power.

As to irreparable harm, the court found that the plaintiffs would suffer immediate financial injury and nonrecoverable costs if the ban were to take effect, including having to invalidate non-competes with current employees, face the “increase[d] [ ] risk that departing workers may take [the named plaintiffs’] intellectual property and proprietary methods to its competitors,” and signal to competitors that it is “open season of poaching of [their] clients and workers.”  Indeed, the named plaintiffs would be unable to recover costs of compliance from the FTC, because federal agencies typically have sovereign immunity for monetary damages.

Finally, in part because of the rule’s immediate financial harm, the court balanced the equities in the plaintiffs’ favor.  Specifically, the court held that an injunction would serve the public interest by maintaining the status quo and preventing substantial adverse economic impact.  The court also held that the FTC, unlike the plaintiffs, would suffer no harm.

After having concluded in her 33-page analysis that the plaintiffs had shown they were likely to succeed on their arguments that the FTC lacked statutory authority to issue substantive rulemaking and that the ban was arbitrary and capricious, the court nonetheless declined to grant the plaintiffs’ request for a nationwide injunction against enforcement of the rule.  Judge Brown acknowledged that nationwide relief may be appropriate in these circumstances, but such relief was not necessary to provide the plaintiffs complete relief “at this preliminary stage.”  The court explained that the plaintiffs had “offered virtually no briefing (or basis) that would support ‘universal’ or ‘nationwide’ injunctive relief.”  It added that the case also differed from other cases brought by the government where nationwide injunctions were granted, because the lawsuit was brought by private entities. 

Other Challenges

On April 24, 2024, a day after the FTC approved the final rule to ban non-competes, the U.S. Chamber of Commerce and other business associations sued the FTC in the U.S. District Court for the Eastern District of Texas challenging the ban.  The court stayed and then dismissed the case without prejudice, but the Chamber later joined the first-filed Ryan action.  On April 25, 2024, another lawsuit, ATS Tree Services, LLC v. Federal Trade Commission, was filed in U.S. District Court for the Eastern District of Pennsylvania challenging the FTC’s non-compete ban and moving for a preliminary injunction against its enforcement pending consideration of the merits.  Oral arguments on that injunction motion are scheduled for July 10, 2024.  The judge presiding over that case has indicated that a decision will be issued by July 23, 2024.

Key Takeaways

Given its preliminary injunction ruling involved such extensive examination of the substantive legal issues, the court will almost certainly follow its own analysis and permanently enjoin the FTC’s non-compete ban in its August 2024 final decision.  However, the court’s preliminary injunction decision suggests that it may well decline to issue a nationwide injunction.  Given the possibility that the injunction may be limited in scope, as well as the possibility that the Pennsylvania federal court could reach a different decision, employers that rely heavily on non-compete agreements should continue to review their policies and practices with an eye towards compliance with the ban while further developments provide greater clarity on the ban’s future, including how the upcoming election will impact the FTC’s approach to non-competes and how appellate courts will rule on challenges to the ban.

Companies that want to re-examine their existing non-compete agreements and audit their protections and controls over confidential and trade secret information can reach out to members of Crowell’s antitrust, labor, or trade secrets teams, including the contacts for this alert.