Texas federal court rejects FTC’s “unfair method of competition” rulemaking authority

The court in Ryan, LLC v. FTC issued a 33-page opinion in support of its decision to issue a preliminary injunction preventing the Non-Compete Rule from taking effect as applied to Plaintiffs.3  The court found that Plaintiffs are likely to succeed on the merits in their challenge to the Non-Compete Rule under the Administrative Procedure Act (APA) because the rule: (1) exceeds the FTC’s statutory authority; and (2) is arbitrary and capricious.4  Specifically, the court explained that while the “FTC has some authority to promulgate rules to preclude unfair methods of competition . . . after reviewing the text, structure, and history of the [FTC] Act, the Court concludes the FTC lacks the authority to create substantive rules through this method.”5  Instead, according to the court, Section 6(g) of the FTC Act is a “housekeeping statute,” authorizing only “rules of agency organization procedure or practice.”6  The court also stated that the Non-Compete 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.’ ”7

Notably, the court specifically declined to issue a nationwide injunction on the basis that “appropriate circumstances”8 did not exist to merit nationwide relief, and Plaintiffs failed to provide “briefing as to how or why nationwide injunctive relief is necessary to provide complete relief to Plaintiffs, at this preliminary stage.”9  In addition, the court did not extend the preliminary injunction to the associational members of the Plaintiff-Intervenors, finding that the issue of associational standing was never briefed.10  The court appeared to leave open the door for the plaintiffs to argue for a broader injunction in future briefing.11

Background on the FTC Rule

On April 23, 2024, the FTC voted to publish a final rule banning the use of non-compete clauses nationwide, classifying such clauses as an unfair method of competition under Section 5 of the FTC Act.12 The rule would deem unlawful existing non-competes entered into with workers who are not “senior executives,” and would ban entering into new non-competes with any worker (including senior executives).  The final rule further purports to preempt all state laws regarding non-competes, unless such state laws afford greater protection to employees.

The Non-Compete Rule is grounded in the FTC majority’s expansive understanding of its authority to target unfair methods of competition under Section 5 of the FTC Act.  This view was outlined in a November 2022 Policy Statement released by the agency stating that “Section 5 reaches beyond the Sherman and Clayton Acts to encompass various types of unfair conduct that tend to negatively affect competitive conditions.” It also stems from the stated position of FTC Chair Lina Khan that the FTC has rulemaking authority under Section 6(g) of the FTC Act related to “unfair methods of competition”.13 

There has been significant public pushback with respect not only to the Noncompete Rule14 in particular, but also, more generally, to the notion that Section 6(g) of the FTC Act even grants the FTC rulemaking authority related to unfair methods of competition to begin with.15  A handful of plaintiffs have brought lawsuits in federal court challenging the legality of the Non-Compete Rule and seeking, among other things, to permanently enjoin the FTC from enforcing the new rule.  In addition to the Ryan case described above, a similar challenge to the Non-Compete Rule is pending in federal court in Pennsylvania, which could result in a nationwide injunction. 16   

Looking Ahead

The court’s decision in Ryan comes at an interesting time for the FTC.  The FTC is hamstrung in arguing it has authority to promulgate the Non-Compete Rule by the Supreme Court’s June 28, 2024 decision in Loper Bright Enterprises v. Raimondo,17 which overruled the Chevron doctrine. The Chevron doctrine18 stated that courts were required to give deference to administrative agencies’ interpretations of the statutes they administer when those statutes were ambiguous.  As our Hogan Lovells antitrust team discusses in more detail in this article, the Loper Bright decision eliminates a significant potential argument that the FTC may have employed to push back against current and future challenges to the FTC’s expansive view of Section 5.  Most immediately, the Loper Bright decision will prevent the FTC from asserting that Chevron deference applies in its arguments to defend the Non-Compete Rule, including in the arguments on the merits in Ryan and in any appeal.

As discussed, the preliminary injunction issued by the court in Ryan is only applicable to the plaintiffs in that case.  A ruling on the merits is expected by August 30, 2024, days ahead of the Rule’s September 4, 2024 effective date. Employers should continue to carefully watch developments in the litigation involving the Non-Compete Rule to see whether a nationwide injunction is granted.

Authored by Lauren Battaglia, Logan Breed, Michael DeLarco, George Ingham, Tao Leung, Chuck Loughlin, and Jill Ottenberg.

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