Client Alert: Texas Court Strikes a Blow to the FTC in Striking Down Non-Compete Ban
August, 2024 - United States of America
On August 20, 2024, commensurate with her ruling granting a preliminary injunction staying the Federal Trade Commission’s (“FTC”) ban on non-compete agreements, Judge Ada E. Brown of the Northern District of Texas set aside the FTC’s Non-Compete Rule and held that such Rule “shall not be enforced or otherwise take effect on its effective date of September 4, 2024, or thereafter.”[1] In granting Ryan’s Motion for Summary Judgment, the Court took a decisive blow to the FTC’s attempt to expand its rulemaking authority and left the fate of non-compete agreements in the hands of the individual states, where it has been for decades.
In issuing the Non-Compete Rule, the FTC attempted to utilize Section 5 of the FTC Act together with Section 6’s “additional powers” provision. Section 5 empowers the FTC to prevent unfair methods of competition through administrative proceedings whereby the FTC holds hearings if it believes a party is using unfair methods of competition. Section 6 includes a provision titled “classification of corporations; regulations” which gives the FTC the power to “[f]rom time to time classify corporations and . . . to make rules and regulations for the purpose of carrying out the provisions of this subchapter.” In looking at this statutory scheme, Judge Brown determined that “[b]y a plain reading, Section 6(g) of the Act does not expressly grant the Commission authority to promulgate substantive rules regarding unfair methods of competition.” The Court found instead that Section 6(g) is a “housekeeping statute.” The Court further detailed that the absence of a penalty provision in Section 6(g) indicates a lack of substantive force and supports that same encompasses only housekeeping rules.
Judge Brown also viewed the statute as a whole and found that “the location of the alleged substantive rulemaking authority is suspect.” It was not given a primary, independent place; is the seventh in twelve almost entirely investigative powers; and fails to cross-reference Section 5. The Court thereby concluded, “that the structure and the location of Section 6(g) indicate that Congress did not explicitly give the [FTC] substantive rulemaking authority under Section 6(g).”
Judge Brown then examined Section 6(g) from a historical perspective. The Court detailed that, for the first 48 years of its existence, the FTC explicitly disclaimed substantive rulemaking authority. The FTC promulgated several substantive rules from 1962 to 1978 but has not promulgated a single substantive rule since 1978. Judge Brown also noted that Congress amended the FTC Act in 1967 and 1968 allowing rulemaking related to specific subjects (i.e., Section 18 providing the FTC with power to make rules dealing with unfair or deceptive practices and not unfair methods of competition). Such amendments would be superfluous if Section 6(g) had already provided such power. As such, the Court determined that the FTC had exceeded its authority in issuing the Non-Compete Rule.
In addition to the lack of authority, Judge Brown also concluded “that the Rule is arbitrary and capricious because it is unreasonably overbroad without a reasonable explanation. The Rule 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.’” The Court detailed that “the Rule is based on inconsistent and flawed empirical evidence, fails to consider the positive benefits of non-compete agreements, and disregards the substantial body of evidence supporting these agreements.” Judge Brown further found that “the FTC failed to sufficiently address alternatives to issuing the Rule.” For all these reasons, the Court struck down the Non-Compete Rule not only as to the named plaintiffs, but across the country.
In the wings, the case of ATS Tree Service, LLC v. The Federal Trade Commission, et al., Case No. 2:24-cv-01743, remains pending before the Hon. Kelley B. Hodge, U.S.D.J. of the Eastern District of Pennsylvania. Judge Hodge recently denied a preliminary injunction and signaled her support for the FTC Non-Compete Rule (see July 29th blog). As of today, that case remains pending with a motion for summary judgment briefing schedule proposal having been filed on August 6, 2024, seeking a ruling in that case by November 27, 2024. Given Ryan’s victory in Texas, ATS Tree Service should dismiss its case so as not to create a potential circuit split that will create compliance confusion in the marketplace. We will have to wait to see what happens in that case.
As a result of this decision, companies and employees nationwide do not have to worry about compliance with the FTC Non-Compete Rule but must keep an eye on state-specific legislation, which has been percolating across the country. The recent trend amongst the states has been to curtail the enforceability of non-compete agreements. Some states have placed income thresholds on non-compete agreements, some have sought to define time, geography, and subject matter limitations, and some have moved towards total bans (see July 18th blog for more detail). In this atmosphere, employers should proactively revisit and tailor their non-compete agreements and employees should be on the lookout for overly broad non-compete provisions. Please contact Kory Ann Ferro or Kelly Purcaro if you have questions about your state’s rules or how to effectively draft enforceable non-compete agreements.
[1] See Ryan LLC v. Federal Trade Commission, Civil Action No. 3:24-cv-0986-E.
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