Texas District Court Enjoins FTC's Rule Banning Non-Compete Clauses

Texas District Court Enjoins FTC's Rule Banning Non-Compete Clauses

July 10, 2024, Covington Alert

On July 3, 2024, Judge Ada Brown of the United States District Court for the Northern District of Texas granted the motions for a preliminary injunction—filed by Ryan LLC (“Ryan”) and several trade associations, including the U.S. Chamber of Commerce (“Chamber”)—to prevent the FTC’s rule banning non-compete clauses from going into effect, but the court’s order only applies to the named plaintiffs (i.e., it is not a nationwide injunction). The court has indicated that it will issue a final order on the merits by August 30, 2024, just a few days before the FTC’s rule is scheduled to go into effect on September 4. It is possible that Judge Brown enjoins the non-compete ban nationwide in her final order.

Background

In April, the FTC issued a final rule banning almost all non-competes with U.S. workers, with narrow exceptions, pursuant to its claimed authority to issue competition-related rules under Sections 5 and 6(g) of the FTC Act. That same day, Ryan challenged the FTC’s rule and, shortly thereafter, filed a motion to stay and preliminarily enjoin the rule, arguing that the FTC has no statutory authority to promulgate the rule, that the rule is the product of an unconstitutional exercise of power, and that the FTC’s acts were arbitrary and capricious. The Chamber and other trade groups intervened as plaintiffs on May 8, making substantially the same arguments.

The Order

In its Order, the court found that the Plaintiffs had demonstrated a likelihood of success that (1) the FTC does not have the statutory authority to engage in competition-related rulemaking, (2) the non-compete rule is arbitrary and capricious, and (3) the plaintiffs and intervenors had satisfied the standard to obtain injunctive relief.

First, the court held that the FTC Act does not authorize the FTC to promulgate substantive competition-related rules based on the plain text, structure, and location of Section 6(g), as well as the history of the FTC Act. Instead, Judge Brown found that Section 6(g) is a “housekeeping statute” that only authorizes the FTC to issue procedural rules. For example, while Congress historically has prescribed sanctions or penalties when authorizing rulemaking, Section 6(g) contains no such provision. Furthermore, for the first 48 years of the FTC Act, until 1962, the FTC did not promulgate any substantive competition-related rules, and it has not done so since 1978. The court also explained that because amendments to the FTC Act expressly allowed substantive rulemaking for specific subjects, any interpretation that Section 6(g) conferred such rulemaking power would render the amendments superfluous.

Second, the court found that the FTC’s promulgation of the non-compete rule is substantially likely to be arbitrary and capricious because it is “unreasonably overbroad without a reasonable explanation.” Noting the FTC’s lack of supporting empirical evidence, the court characterized the rule as a “one-size-fits-all approach with no end date, which fails to establish a rational connection between the facts found and the choice made.” The court also found that the FTC did not sufficiently consider alternative avenues to the rule.

Third, the court determined that the Plaintiffs would suffer irreparable harm—namely, nonrecoverable costs required to counteract and update all existing non-compete agreements—and that the balance of equities and public interest weighed in favor of relief.

The Scope of Relief

While Ryan requested nationwide injunctive relief, the court limited the scope of the injunction to Ryan and the Chamber, though not its members. The court noted that no party had briefed why nationwide relief was necessary, and the Chamber had not briefed associational standing such that relief could be granted to its members.

Takeaways

The Order suggests that the court likely will invalidate or enjoin the rule when it issues its final order on the merits on August 30. However, it is unclear whether the rule will be invalidated/enjoined entirely or stayed only with respect to the plaintiffs/intervenors involved in the litigation.

To the extent you have questions about how the rule or the court’s Order could impact you, please contact one of the Covington attorneys identified in this alert.