As I wrote in April, a lawsuit filed by Ryan, LLC in the United States District Court for the Northern District of Texas, challenged the recently adopted Federal Trade Commission’s (FTC) rule making most non-compete agreements unenforceable (Rule). See FTC’s Non-Compete Rule Affecting Executive Compensation Challenged in Courts. On July 3, 2024, the court granted a preliminary injunction against enforcement of the Rule against the plaintiffs in that case (Plaintiffs), pending a decision on the merits. The court issued the preliminary injunction because it found the Plainiffs had a likelihood of succeeding on the merits that (1) the FTC exceeded its statuory authority in enacting the Rule; (2) the Rule was arbitrary and capricious; and (3) the Rule would cause irreparable harm to the Plaintiffs if a preliminary injunction were not issued.

FTC Exceeded Authority. Plaintiff’s claimed that the Rule exceeds the FTC’s statutory authority because the statute creating the FTC (FTC Act) does not authorize substantive rulemaking. The court stated the FTC Act grants the FTC the power to “classify corporations and to make rules and regulations for the purpose of carrying out the provisions” of the FTC Act. However, the judiciary remains the final authority with respect to questions of statutory construction and courts must reject administrative agency actions which exceed the agency’s statutory mandate. The court stated the question is whether the FTC’s ability to promulgate rules concerning unfair methods of competition include the authority to create substantive rules regarding unfair methods of competition. It concluded that the FTC Act gives the FTC authority to issue rules of agency organization procedure or practice not substantive rules. The court agreed with the Plaintiffs who pointed to the lack of a statutory penalty for violating rules promulgated by the FTC as demonstrating the lack of substantive rulemaking power. The court concluded that the text and structure of the FTC Act reveal the FTC lacks substantive rulemaking authority with respect to unfair methods of competition. Therefore, when adopting the Rule, the FTC exceeded its authority and the Plaintiffs are likely to succeed on the merits.

Arbitrary and Capricious. The court also found that there is a substantial likelihood that the Rule is arbitrary and capricious because it is unreasonably overbroad without a reasonable explanation as to why the FTC chose to impose such a sweeping prohibition. Further, the FTC did not sufficiently consider alternatives to the general ban.

Irreparable Harm. The court found that if a preliminary injunction were not issued, Plaintiffs would suffer immediate irreparable harm because they would not be able to rely on existing non-compete agreements or enter into new ones and would be required to notify workers that existing non-compete provisions are now invalid. This would increase the risk that departing workers might take intellectual property and proprietary methods to competitors. Further, significant time and resources would have to be spent to counteract the effect of the Rule.

No Nation-Wide Relief. While the court granted a preliminary injunction to prevent the FTC from enforcing the rule against the named Plaintiffs, it refused to make the preliminary injunction apply nation-wide. The main reason for limiting the injunction was that the Plaintiffs did not argue for nation-wide application in their briefs. The court stated it intended to issue a decision on the merits on or before August 30, 2024.

Stay Tuned. This preliminary decision indicates that the court is likely to issue a permanent injunction when it decides the case on the merits in August. Plaintiffs will likely ask for the decision to have nation-wide effect. Given the Supreme Court’s recent decision in Loper Bright Enterprises v. Raimondo, overturning Chevron‘s deference to administrative agencies, this could be the end of the FTC Rule.