The Federal Trade Commission has issued a final rule that largely bans all post-employment non-compete agreements, with limited exceptions. Two decisions in July addressed the FTC’s ban. One found the ban on post-employment non-competes to be outside the commission’s statutory authority and the other affirmed the ban.

Ryan, LLC, et. al. v. Federal Trade Commission

On Wednesday, July 3, in one of the earliest high-profile decisions to apply the U.S. Supreme Court decision to overturn the Chevron doctrine in Loper Bright Enterprises v. Raimondo, the U.S. District Court for the Northern District of Texas found in Ryan, LLC, et. al. v. Federal Trade Commission, Case No. 3:24-cv-00986-E (“Ryan v. FTC”), that the Federal Trade Commission’s proposed ban on post-employment non-compete agreements exceeded the commission’s power. The District Court did not issue a nationwide injunction against the non-compete ban, but limited its injunction to the named plaintiffs: Ryan, LLC, the Chamber of Commerce of the United States of America, Business Roundtable, Texas Association of Business, and the Longview Chamber of Commerce (but not to the members of these entities). As such, this ruling does not prevent the FTC from enforcing its non-compete ban against any other entity or person. However, the Ryan decision is a likely harbinger of further legal challenges to the ban that may be more expansive in scope.

In Ryan v. FTC, the plaintiffs argued the federal agency had acted both outside the scope of its statutory authority and arbitrarily and capriciously. The FTC relied upon Section 6 of the Federal Trade Commission Act as the basis for its statutory authority to issue a rule that bans post-employment non-compete agreements. The court described Section 6 of the Act as “grant[ing] the Commission additional powers to support the adjudicatory scheme.” See 15 U.S.C. § 46.2. Most of these powers are investigatory or ministerial. See 15 U.S.C. § 46. One provision titled “[c]lassification of corporations; regulations,” gives the commission the power to “[f]rom time to time classify corporations and (except as provided in section 57a(a)(2) of this title) to make rules and regulations for the purpose of carrying out the provisions of this subchapter.” 15 U.S.C. § 46(g).

The court found the FTC had the authority to adopt procedural, but not substantive, rules regarding unfair methods of competition. It opened its analysis by describing Section 6 as providing the commission with “additional powers that generally aid in the administration of that [Section 5] adjudication-focused scheme”:

In Section 5 of the FTC Act, Congress vested the Commission with the power to prevent unfair methods of competition:

The Commission is hereby empowered and directed to prevent persons, partnerships, or corporations . . . from using unfair methods of competition in or affecting commerce and unfair or deceptive acts or practices in or affecting commerce.

15 U.S.C. § 45(a)(2). And as stated above, Section 6 gives the FTC the power “to make rules and regulations for the purpose of carrying out the provisions of this subchapter.” 15 U.S.C. § 46(g). Section 5 creates a comprehensive scheme to prevent unfair methods of competition, while Section 6 enumerates additional powers that generally aid in the administration of that adjudication-focused scheme.

The court framed the issue as “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.” (Emphasis added). The court concluded that Section 6 of the FTC Act did not grant the FTC that authority:

The Court starts with the text of Section 6(g) and 15 U.S.C. § 57a. See Hightower v. Tex. Hosp. Ass’n, 65 F.3d 443, 448 (5th Cir. 1995) (“When courts interpret statutes, the initial inquiry is the language of the statute itself.”). Under Section 6(g) of the FTC Act, the Commission has the power to “classify corporations and (except as provided in section 57a(a)(2) of this title) to make rules and regulations for the purpose of carrying out the provisions of this subchapter.” 15 U.S.C. § 46(g). By 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. Next, 15 U.S.C. § 57a empowers the FTC to prescribe “interpretive rules and general statements of policy with respect to unfair or deceptive acts or practices in or affecting commerce.” See 15 U.S.C. § 57a. Section 57a limits the FTC’s ability to make rules dealing with unfair or deceptive practices—not unfair methods of competition. 15 U.S.C. § 57a(2).6 However, 15 U.S.C. § 57a acknowledges the FTC has some rulemaking power “with respect to unfair methods of competition in or affecting commerce.” 15 U.S.C. § 57a(2).

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. 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 it relevant that Congress did not provide for a sanction for violation of the FTC’s rules, and such a sanction would “confirm[ ] that those rules create substantive obligations for regulated parties…. Section 6(g) contains no penalty provision—which indicates a lack of substantive force.” In addition, the court found that the location of the statutory provision relied upon by the FTC also suggested that it did not grant substantive rulemaking authority:

Furthermore, viewing the statute as a whole, the location of the alleged substantive rulemaking authority is suspect. First, the initial part of Section 6(g) merely vests the FTC with the power to “[f]rom time to time classify corporations;” the alleged substantive rulemaking power is the latter portion of the statute. 15 U.S.C. § 46(g). If the FTC is correct in its interpretation, then Congress did not choose to place such substantial power in a primary, independent place. See Inhance Techs., L.L.C. v. EPA, 96 F.4th 888, 893 (5th Cir. 2024) (“[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)). Further, Section 6(g) is the seventh in a list of twelve almost entirely investigative powers. See 15 U.S.C. § 46. Last, Section 6(g) fails to mention Section 5 or any other substantive authority from where such substantive rulemaking power would stem. See 15 U.S.C. § 46.

Further, the court found that the legislative history of the Act, including amendments that the FTC claimed “preserv[ed] the Commission’s authority to regulate unfair methods of competition, further ratifying the Commission’s authority,” did not suggest that Congress had intended to grant the commission such authority to issue substantive rules governing unfair methods of competition. It stated: “the Court rejects such reasoning as a piecemeal attempt to confer rulemaking authority that Congress has not affirmatively granted to the FTC. The role of an administrative agency is to do as told by Congress, not to do what the agency think it should do.”

The District Court concluded that:

“Agencies do not have unlimited power to accomplish their policy preferences until Congress stops them; they have only the powers that Congress grants through a textual commitment of authority.” See Central Forwarding, Inc. v. ICC, 698 F.2d 1266, 1272 (5th Cir. 1983) (“[I]f Congress has granted only limited powers to the agency, and the regulation bears little kinship to the rulemaking authority expressed by statute, the validity of the regulation is suspect.”). The Court concludes the text and the structure of the FTC Act reveal the FTC lacks substantive rulemaking authority with respect to unfair methods of competition, under Section 6(g). See generally 15 U.S.C. § 46(g); 15 U.S.C. § 57a. 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.

The court declared the FTC’s ban on non-compete agreements to be arbitrary and capricious:

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.” 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))…. 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.

Finally, the court found that the FTC had failed to adequately consider alternatives:

Second, the FTC insufficiently addressed alternatives to issuing the Rule…. 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 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. 149 at 362).

The FTC’s “compelling justifications” for its decision to not consider other exceptions or alternatives does not adequately justify the far reach of the Rule. The FTC dismissed any possible alternatives, merely concluding that either the pro-competitive justifications outweighed the harms, or that employers had other avenues to protect their interests. (See ECF No. 149 at 356–74) (stating the categorical ban “advances the final rule’s objectives to a greater degree than differentiating among workers”). Thus, the Court cannot find the Non-Compete Rule “fall[s] within a zone of reasonableness” and is “reasonably explained.” Emily’s List v. FEC, 581 F.3d 1, 22 n.20 (D.C. Cir. 2009). As such, the Court concludes the Rule is arbitrary and capricious.

After finding that the plaintiffs would suffer irreparable harm and the balance of equities favor the plaintiffs, the court declined to extend its ruling beyond the named plaintiffs. It determined that an injunction that barred the FTC from enforcing the ban on non-competes against the named plaintiffs was sufficient to provide complete relief. The court declined to extend the injunction to the named plaintiffs’ members because the plaintiffs had not briefed that issue:

Furthermore, the Plaintiff-Intervenors in this proceeding appear to seek associational standing on behalf of their respective member entities. (ECF No. 37 at 18) (“Plaintiff-Intervenors have associational standing to bring this suit on behalf of their various members.”). However, Plaintiff-Intervenors have not briefed associational standing. (See ECF No. 47). Plaintiff-Intervenors have directed the Court to neither sufficient 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. Without such developed briefing, the Court declines to extend injunctive relief to members of Plaintiff-Intervenors.

Accordingly, the District Court issued an injunction to bar the FTC from implementing or enforcing its ban on non-competes against Ryan, LLC, the U.S. Chamber of Commerce of the United States of America, Business Roundtable, Texas Association of Business, and the Longview Chamber of Commerce. The court also stated that a preliminary injunction order would be issued.

ATS Tree Services, LLC v. Federal Trade Commission, et. al.

On Tuesday, July 22, in ATS Tree Services, LLC v. Federal Trade Commission, et. al., Case No. 24-1743, the U.S. District Court for the Eastern District of Pennsylvania rejected a challenge to the Federal Trade Commission’s ban on post-employment non-compete agreements.

ATS Tree Services, LLC had challenged the FTC’s ban on post-employment non-compete agreements, arguing that barring such agreements was outside the scope of the commission’s statutory authority. The court rejected ATS’s arguments, and found that:

• The FTC has the statutory authority to apply substantive rules. The court stated:

Plaintiff argues that the FTC is a purely adjudicative body and that because the Act empowers the FTC to proceed through complaint and hearing, it lacks substantive rulemaking authority. (ECF No. 11 at 14.) Plaintiff rationalizes the FTC’s powers under Section 6(g) by providing that any rulemaking authority the Act authorized under Section 6(g) is procedural in nature, for the sole purpose of developing mechanisms for the adjudications under Section 5. (ECF No. 11 at 5, 11.) However, Plaintiff’s interpretation runs contrary to logic, as the ordinary meaning of the statutory text provides the FTC with the authority to promulgate rules prohibiting unfair methods of competition. The plain text of the statute provides no express limitations on the FTC’s rulemaking authority and the Court will not read in such limitations. As such, it would undermine the purpose of the FTC Act to interpret the statute as providing only adjudicative authority, when it is clear in the text what Congress intended the Act to do and what authority it granted to the FTC to fulfill its purpose.

• The FTC has the power to issue forward-looking rules, as opposed to merely taking adjudicatory action, including the power to prevent anti-competitive conduct, which included, in the court’s view, post-employment non-compete agreements. The court stated :

The Court now turns to the FTC’s mandate to prevent prohibited “unfair methods of competition.” Section 5 of the Act “empowered and directed” the FTC to “prevent persons, partnerships, or corporations, . . . from using unfair methods of competition in or affecting commerce and unfair or deceptive acts or practices in or affecting commerce.” 15 U.S.C. § 45(a)(2) (emphasis added). Merriam-Webster’s Dictionary defines the term “prevent” as “to keep from happening or existing.” Prevent, MERRIAM-WEBSTER, https://www.merriamwebster. com/dictionary/prevent (last accessed July 22, 2024) [https://perma.cc/7WYQ-K6JA]. Prevent is an inherently forward-looking directive, requiring the FTC to take action to avoid or avert a future occurrence in addition to remediating or stopping past harm. Plaintiff asks the Court to cabin the FTC’s power as solely adjudicatory, and therefore reactionary and backward-looking, only arising once unfair methods of competition have already occurred. The Court declines to do so. If the Court adopts ATS’s interpretation of the Act, it would limit the FTC’s power to only responsive or remedial methods of addressing unfair methods of competition through adjudication, which is inherently at odds with the ordinary interpretation of the word “prevent.”

• In the court’s view, the statutory history of the Federal Trade Commission Act, including its amendments, also demonstrated that the agency has the authority to bar post-employment non-compete agreements, finding that “[h]ad Congress intended to limit the FTC’s substantive rulemaking authority under Section 6, it would have done so at any time over the last century and, more specifically, any of the times it amended the Act.”
• The major question doctrine did not bar the ban: “ … [b]ecause the FTC’s Rule falls squarely within its core mandate, and [the FTC] has previously used its Section 6(g) rulemaking power in similar ways, the Court finds that the Major Question Doctrine is not applicable.”
• Congress did not impermissibly delegate authority because it articulated an “intelligible principle” for the FTC to implement.

Next Steps

It is anticipated that one or both decisions in Ryan and ATS will be appealed to their respective Federal Circuit Court of Appeals. Depending on the appeals, the matter could go to the Supreme Court. The FTC’s ban becomes effective on September 4, 2024 unless a court issues a nation-wide injunction.

Under the FTC’s final rule, employers must provide notice to employees that the employer will not enforce the non-compete provision. The notice must be issued on or before the effective date of the rule, unless a ‎federal court issues a nation-wide injunction. ‎

There is pending in the House and Senate legislation, the Workforce Mobility Act of 2023, that prohibits the use of non-compete agreements in the context of commercial enterprises except under certain circumstances, such as the sale or dissolution of a business.  The bill is sponsored by Senators Christopher Murphy (D-CT) and Todd Young (R-IN), Tim Kaine (D-VA) and Kevin Cramer (R-ND) in the Senate and Representatives Scott Peters (D-CA) and Mike Gallagher (R-WI) in the House.  If passed, this bill may have similar effects, and replace, the FTC’s ban on post-employment non-compete agreements.

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