In a follow-up to our April 24, 2024 article regarding the FTC rule banning non-competition covenants and agreements, in a closely watched action entitled Ryan LLC, v. Federal Trade Commission[1], a US District Court in the Northern District of Texas ruled on a motion filed by Ryan LLC and other plaintiffs (the Chamber of Commerce of the United States of America, Business Roundtable, Texas Association of Business, and Longview Chamber of Commerce) (collectively “Plaintiffs”) for a preliminary injunction against the Federal Trade Commission’s (FTC) rule banning most non-compete agreements. The court granted the preliminary injunction after finding the FTC likely exceeded its statutory authority and the rule was arbitrary and capricious.
The FTC recently enacted a rule banning most non-compete agreements between employers and workers, set to take effect on September 4, 2024. The Plaintiffs filed a lawsuit challenging the rule under the Administrative Procedure Act, asserting the FTC lacked statutory authority for the rule, the rule was unconstitutional, and it was arbitrary and capricious. The Plaintiffs moved for a preliminary injunction to prevent the rule from taking effect while the court decided the case’s merits. The court’s focus centered on the issue of whether “…the FTC’s ability to promulgate rules concerning unfair methods of competition includes the authority to create substantive rules regarding unfair methods of competition.[2].”
The court explained the four factors required for a preliminary injunction: the likelihood of success on the merits, irreparable harm without an injunction, balance of equities in favor of an injunction, and public interest served by an injunction. Finding that the “FTC lacks the authority to create substantive rules the FTC Act[3].” The court found that the Plaintiffs have shown a likelihood of success on the merits because the FTC lacks statutory authority for substantive rulemaking on unfair competition methods and the sweeping rule is arbitrary and capricious. The court found that Irreparable harm would occur through unrecoverable compliance costs and that the balance of equities and public interest favored an injunction to maintain the status quo.
The court granted the preliminary injunction against the FTC’s rule banning most non-compete agreements, finding the FTC likely exceeded its authority and the rule is arbitrary and capricious. The injunction applies only to the plaintiffs, not universally.
However, notably, the injunction is limited to the Plaintiffs and postpones the Rule’s effective date as applied to Plaintiffs, not nationwide. The Court specifically found that the “Plaintiffs have offered no briefing as to how or why nationwide injunctive relief is necessary to provide complete relief to Plaintiffs, at this preliminary stage[4].”
The court intends to issue a final ruling on the merits by August 30, 2024.
We expect an immediate appeal to the United States Court of Appeals for the Fifth Circuit by the FTC. While the case goes through the appellate courts, our team at TALG will keep you apprised of all the latest developments.
[1] Civil Action No. 3:24-CV-00986-E
[2] Id. At page 14
[3] Id. At page 15
[4] Id. At page 31
