On August 20, the U.S. District Court for the Northern District of Texas in Ryan, LLC et al. v. Federal Trade Commission, granted the plaintiffs’ motions for summary judgment and found the Federal Trade Commission’s ban on post-employment non-compete agreements to be outside the scope of the FTC’s statutory authority, and arbitrary and capricious. The effect of this ruling is to bar the FTC from enforcing the ban the commission adopted on April 23 on post-employment non-compete agreements nationwide.

The District Court found that the FTC does not have authority to issue substantive rules that preclude unfair methods of competition:

Plainly read, the Court concludes the FTC has some authority to promulgate rules to preclude unfair methods of competition. Indeed, the Act alludes to this power in Section 18. 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. Section 6(g) is “indeed a ‘housekeeping statute,’ authorizing what the APA terms ‘rules of agency organization procedure or practice’ as opposed to ‘substantive rules.’” Chrysler Corp. v. Brown, 441 U.S. 281, 310, 99 S. Ct. 1705, 1722, 60 L. Ed. 2d 208 (1979).

The Court also found that the FTC had acted arbitrarily in enacting the final rule because the commission had both adopted a one-size-fits-all approach and had not adequately considered alternatives:

Because the FTC is an administrative agency, the Court may analyze the Commission’s actions under the APA’s arbitrary-and-capricious standard. See 5 U.S.C. § 706(2)(A). The Court concludes 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.” State Farm, 463 U.S. at 43, 103 S. Ct. at 2867 (quoting Burlington Truck Lines, Inc. v. United States, 371 U.S. 156, 168, 83 S. Ct. 239, 246, 9 L. Ed. 2d 207 (1962)).

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While considering less disruptive alternatives, the FTC “was required to assess whether there were reliance interests, determine whether they were significant, and weigh any such interests against competing policy concerns.” Wages & White Lion, 16 F.4th at 1139 (quoting Regents, 591 U.S. at 33, 140 S. Ct. at 1915)). The record shows the Commission did not conduct such analysis—instead offering the conclusion that “case-by-case adjudication of the enforceability of non-competes has an in terrorem effect that would significantly undermine the Commission’s objective to address non-competes’ tendency to negatively affect competitive conditions in a final rule.” (ECF No. 210 at 108).

The FTC’s “compelling justifications” for its decision to not consider other exceptions or alternatives does not adequately justify the Rule. The FTC dismissed any possible alternatives, concluding that either the pro-competitive justifications outweighed the harms, or that employers had other avenues to protect their interests. (See ECF No. 210 at 106–11) (stating the categorical ban “advances the final rule’s objectives to a greater degree than differentiating among workers”). The Court cannot conclude the Non-Compete Rule “fall[s] within a zone of reasonableness” nor is it “reasonably explained.” Emily’s List v. FEC, 581 F.3d 1, 22 n.20 (D.C. Cir. 2009). The Court concludes that the Rule is arbitrary and capricious.

Based on these rulings, the District Court found the FTC’s ban on post-employment non-compete agreements to be unlawful, and ruled that the FTC’s rule “shall not be enforced or otherwise take effect on its effective date of September 4, 2024, or thereafter.”

This article summarizes aspects of the law and does not constitute legal advice. For legal advice for your situation, you should contact an attorney.