Introduction

The United States District Court for the Northern District of Texas, on July 3, 2024, granted a preliminary injunction against the Federal Trade Commission’s rule banning non-compete clauses in employment contracts (“Non-Compete Rule”), delaying implementation (with a catch described below) and setting the stage for a more thorough examination of the FTC's regulatory powers. This decision has potentially profound implications for businesses, employees and the agency, addressing the contentious issue of non-compete agreements and the extent of the FTC's authority.

The FTC’s Non-Compete Rule

The FTC's Non-Compete Rule aims to broadly prohibit employers from entering into or enforcing non-compete clauses with workers, with certain exceptions (e.g., for certain senior executives and bona fide sales of businesses).  The rule is expansive, banning even certain non-solicitation, non-disclosure and other restrictive covenants common in the mortgage industry.  The FTC set the rule to take effect on September 4, 2024, intending to significantly shift how non-compete agreements would be regulated in the United States, moving from mostly state-level regulation to a federal mandate. 

The Case

In Ryan LLC et al v. Federal Trade Commission, the plaintiffs (Ryan LLC, the Chamber of Commerce of the United States of America, Business Roundtable, Texas Association of Business, and Longview Chamber of Commerce) argued that the FTC overstepped its statutory authority in promulgating the rule and that the rule itself was arbitrary and capricious.  The arguments became even more compelling in the wake of the recent Supreme Court opinion in Loper Bright and Relentless expressly overturning the Chevron doctrine.  See our recent blogpost on that case here. 

Analysis and Decision

The federal district court’s memorandum opinion finds that the plaintiffs are likely to succeed on the merits, based on the following reasons:

1. Statutory Authority: The court found that the FTC lacks substantive rulemaking authority with respect to unfair methods of competition under Section 6(g) of the FTC Act. The decision highlights the importance of statutory interpretation and legislative intent, concluding that the FTC overstepped its bounds by attempting to implement the Non-Compete Rule without explicit congressional authorization.

2. Arbitrary and Capricious Standard: The court also determined that the Non-Compete Rule was arbitrary and capricious. The rule's broad scope and lack of a nuanced approach contains fatal flaws, including failing to establish a rational connection between the facts found and the regulatory choices made. The court emphasized that a more tailored approach, considering the diverse impacts on various industries and demographics, is necessary.

3. Balance of Harm, Equities and the Public Interest:  In granting the preliminary injunction, the court considered the balance of harms and the public interest. It concluded that the plaintiffs were likely to suffer irreparable harm and that these harms outweighed the FTC's arguments for immediate implementation of the rule. The decision also underscored the need to carefully weigh regulatory impacts on the public interest.

Implications

This ruling temporarily halts the enforcement of the FTC’s Non-Compete Rule, allowing time for a more detailed judicial review of the rule's merits and the FTC's authority. But the catch is that the court applied the preliminary injunction to only the plaintiffs in the case, and not the members of the plaintiff trade associations.  The court intends to further rule on the merits by August 30, 2024, giving further clarity on the future of non-compete agreements and the FTC's regulatory powers.

See the FTC's Non-Compete Ban Rule here. 

Next Steps

Stay tuned for updates as we continue to monitor this critical legal battle and its implications for the mortgage community and beyond.  For more information, contact Troy Garris at troy@garrishorn.com or 301-461-8952.