The final rule issued recently by the Federal Trade Commission (FTC) banning non-compete agreements for employees (the rule) has been the subject of contentious litigation. On July 3, 2024, in the first decision on the rule’s enforceability, U.S. District Judge Ada E. Brown of the Northern District of Texas enjoined the agency from enforcing the rule against two specific plaintiffs, but declined to issue a nationwide injunction against enforcement.
Twenty days later, U.S. District Judge Kelley Brisbon Hodge of the Eastern District of Pennsylvania took the opposite approach, rejecting a similar challenge to the rule and expressly finding that the FTC had properly exercised its rulemaking authority. The split in authority created substantial ambiguity for employers, who were suddenly tasked with determining how to move forward with existing and prospective protections that may have now been rendered unenforceable.
Judge Brown’s Influence
That ambiguity has been resolved, at least for the moment. Judge Brown granted the plaintiffs’ motion for summary judgment in Ryan LLC v. Federal Trade Commission, holding that the FTC exceeded its rulemaking authority and halting the final rule from being enforced anywhere in the U.S.
In her initial ruling, Judge Brown had granted a preliminary injunction enjoining the FTC from enforcing the rule against the Ryan plaintiffs. In doing so, the court held that the FTC lacked the authority to issue the rule based on “the text, structure, and history” of the Federal Trade Commission Act. Emboldened by the court’s ruling, the plaintiffs filed a motion for summary judgment on their claims under the Administrative Procedure Act (APA) and Declaratory Judgment Act.
Expanding upon the court’s reasoning in granting injunctive relief, Judge Brown’s latest ruling concluded that the plaintiffs were entitled to summary judgment on all their claims because the FTC exceeded its statutory authority in implementing the rule and the rule was arbitrary and capricious. Specifically, the court found that the statutory provision relied on by the FTC did not grant the Commission authority to promulgate substantive rules regarding unfair methods of competition. Instead, the court explained, the subject statute was merely a "housekeeping statute" that authorized the FTC to establish only procedural rules to aid in its adjudication of complaints of unfair methods of competition. In reaching this conclusion, Judge Brown noted that the FTC Act does not provide express rulemaking authority to the FTC, despite having been amended numerous times, as well as the lack of a statutory penalty for violations of FTC rules.
After determining that the rule exceeded the FTC’s authority, the court went a step further and found that it was "arbitrary and capricious" due to its unreasonably overbroad, one-size-fits-all approach to non-compete clauses. Judge Brown opined that the Commission lacked evidence to demonstrate why it chose to impose “such a sweeping prohibition” instead of targeting specific, harmful non-competes. She stated further that the FTC failed to sufficiently address alternatives to issuing the rule and in conclusory determining that assessing the enforceability of non-competes on a case-by-case basis would undermine the Commission’s objectives.
New Order
Having concluded that the FTC lacked statutory authority to promulgate the rule and that the rule was arbitrary and capricious, the court next assessed the appropriate remedy under the APA and ruled that the rule should not be enforced or otherwise take effect on its effective date of Sept. 4, 2024, or anytime thereafter.
For the time being, this new order provides employers with temporary relief from the rule. That said, this is unlikely to be the end of the debate. The FTC is likely to appeal this ruling to the U.S. Court of Appeals for the Fifth Circuit. Litigation in other courts may proceed at the same time. Employers can reasonably expect this matter to remain without a final determination for more than a year, and potentially being resolved in the future by the U.S. Supreme Court. Given the overall uncertainty, employers that use non-compete agreements may want to consult their counsel regarding the following:
- Enforceability of current and prospective non-compete provisions;
- Prospective revisions to current non-compete provisions;
- Differences between restrictive covenants for senior executives and other employees;
- Communicating with current and former employees about the status of their restrictive covenant agreements.
This article originally appeared on Lewis Brisbois.
About the Authors:
Adam E. Collyer is a partner at Lewis Brisbois. Adam.Collyer@lewisbrisbois.com
Tova Rabin is an associate at Lewis Brisbois. Tova.Rabin@lewisbrisbois.com