In its highly anticipated July 3 ruling, the Texas federal court in Ryan v. FTC issued a partial stay on the FTC's rule purporting to broadly illegalize as a matter of law noncompete agreements nationwide. Here's a brief summary of what the Court said, did, and equally, if not more important - didn't do - with respect to the noncompete ban in this 33-page decision.
What the Ryan Court Said
By way of background, Judge Brown lays out that
"This is a dispute over the FTC’s rulemaking authority concerning the enforceability of employer/employee non-compete agreements. These agreements are restrictive covenants that prohibit an employee from competing against the employer ... Regarding the prevalence of non-compete agreements, the Parties’ joint appendix provides: [T]he Commission finds that non-competes are in widespread use throughout the economy and pervasive across industries and demographic groups, albeit with some differences in the magnitude of the prevalence based on industries and demographics. The Commission estimates that approximately one in five American workers—or approximately 30 million workers—is subject to a non-compete ...
"On April 23, 2024, the FTC adopted the final Non-Compete Rule. See 16 C.F.R. § 910. The Rule provides, in pertinent part: Non-compete clause means: (1) A term or condition of employment that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from: (i) Seeking or accepting work in the United States with a different person where such work would begin after the conclusion of the employment that includes the term or condition; or (ii) Operating a business in the United States after the conclusion of the employment that includes the term or condition. 16 C.F.R. § 910.1 ...
"[T]he Rule essentially provides that it is an unfair method of competition—and therefore a violation of Section 5—for persons to enter or enforce non-compete agreements. The Rule also supersedes state laws that would “permit or authorize” non-compete agreements. See 16 C.F.R. § 910.4.
The Court then turned to the primary challenge to the FTC Rule - namely, that the FTC exceeded its authority in promulgating the Rule, and stated as follows:
"Plainly read, the Court concludes the FTC has some authority to promulgate rules to preclude unfair methods of competition. Indeed, the Act says as much by alluding to this power in 15 U.S.C. § 57a. See 15 U.S.C. § 57a. However, after reviewing the text, structure, and history of the Act, the Court concludes the FTC lacks the authority to create substantive rules through this method ... the lack of a penalty included with Section 6(g) supports that such provision encompasses only housekeeping rules—not substantive rulemaking power ... [and] (“[A]gencies, as mere creatures of statute, must point to explicit Congressional authority justifying their decisions.” (quoting Clean Water Action v. EPA, 936 F.3d 308, 313 n.10 (5th Cir. 2019)) ... Agencies are creatures of Congress—“an agency literally has no power to act . . . unless and until Congress confers power upon it.” Louisiana Pub. Serv. Comm’n v. FCC, 476 U.S. 355, 374, 106 S. Ct. 1890, 1901, 90 L. Ed. 2d 369 (1986). As “[t]he question to be answered is ‘not what the [Commission] thinks it should do but what Congress has said it can do,’” the Court must look to what Congress explicitly gave the FTC the authority to do. National Petroleum, 482 F.2d at 674 (quoting Civil Aeronautics Bd., 367 U.S. at 322, 81 S. Ct. at 1617).
"The Court concludes the structure and the location of Section 6(g) show that Congress did not explicitly give the Commission substantive rulemaking authority under Section 6(g). ... Thus, when considering the text, Section 6(g) specifically, the Court concludes the Commission has exceeded its statutory authority in promulgating the Non-Compete Rule, and thus Plaintiffs are likely to succeed on the merits."
Judge Brown didn't stop there; she further stated that in her view, the Rule seemed arbitrary and capricious (the legal standard for challenging an agency's Rule), and this is the most telling language in the entire decision:
"The Court finds there is a substantial likelihood the Rule is arbitrary and capricious because it is unreasonably overbroad without a reasonable explanation. It imposes 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' ... In enacting the Rule, the Commission relied on a handful of studies that examined the economic effects of various state policies toward non-competes. However, no state has ever enacted a non-compete rule as broad as the FTC’s NonCompete Rule. Further, the FTC’s evidence compares different states’ approaches to enforcing non-competes on based on the specific factual situation—completely inapposite from the FTC imposing a categorical ban. As to this latter point, the FTC provides no evidence or reasoned basis. The Commission’s lack of evidence as to why they chose to impose such a sweeping prohibition—that prohibits entering or enforcing virtually all non-competes—instead of targeting specific, harmful non-competes, renders the Rule arbitrary and capricious.
What the Ryan Court Did - and Didn't - Do
As a result of the above, the Court issued Ryan the TRO they sought - but at the same time denied the same injunctive relief to many of the other, interested non-parties that sought to intervene because the Court felt that there was insufficient evidence of their respective associational member(s) for which they seek standing, nor any of the three elements that must be met regarding associational standing, namely “(1) the association[s’] members would independently meet the Article III standing requirements; (2) the interests the association[s] seek to protect are germane to the purpose of the organization[s]; and (3) neither the claim asserted nor the relief requested requires participation of individual members.” Ctr. for Biological Diversity v. EPA, 937 F.3d 533, 536 (5th Cir. 2019) (internal citation omitted); see Franciscan All., Inc. v. Azar, 414 F. Supp. 3d 928, 938 (N.D. Tex. 2019).
What's Coming Next
While the Court was clear in its decision that it takes a very dim view of the FTC's Rule's likelihood of survival, for now, everyone not a named plaintiff in Ryan is awaiting the Court's further ruling on this issue that is expected on August 30. One of the chief problems this poses, however, is taht the Rule's current effective date is just days later - September 4 - and no employer should want to be in the position of needing to scramble frantically to alter their employment agreements on this front on such short notice. Therefore, I reiterate my earlier recommendation that employers confer with their local employment counsel as soon as possible to address any such concerns in advance.
