Court Blocks FTC’s Rule Banning Non-Compete Agreements but Declines to Issue Nationwide Injunction

Last week, a court preliminarily enjoined the Federal Trade Commission’s rule banning post-employment non-competition covenants (the “Rule”) in the vast majority of employment contracts nationwide. In Ryan LLC v. Federal Trade Commission, a district court in the Northern District of Texas concluded that the Rule exceeds the FTC’s statutory authority and found a substantial likelihood the Rule is arbitrary and capricious in violation of the Administrative Procedure Act. The court’s order stays the Rule’s effective date and preliminarily enjoins its enforcement, but the scope of relief is limited to the plaintiffs in the case. The court intends to rule on the merits of the case by August 30, before the Rule is slated to take effect on September 4.

The decision is a setback for the FTC’s efforts to ban the use of non-competes on a wholesale basis and comes at a time when federal agencies have seen their regulatory powers limited by a range of recent Supreme Court decisions, most notably including Loper Bright Enterprises v. Raimondo, which overturned Chevron deference to agency action.

Background and the Court’s Opinion

In April, the FTC issued the Rule effectively banning virtually all non-compete agreements, deeming it an unfair method of competition in violation of Section 5 of the FTC Act for employers to enter into a non-compete agreement with a worker. Within hours, Ryan LLC filed suit challenging the Rule and, thereafter, four other business associations (including the US Chamber of Commerce) joined the suit as plaintiff-intervenors.

• FTC’s Statutory Authority: In concluding that Plaintiffs’ challenge is likely to succeed on the merits, the court held that the FTC exceeded its statutory authority because the FTC Act “does not expressly grant the Commission” the authority to issue substantive rules to address unfair methods of competition. According to the court, “the text, structure, and history” of Section 6(g) of the FTC Act indicate that it is a “housekeeping statute”—one that allows the FTC to issue procedural rules concerning the agency’s organization and operations but does not grant authority to promulgate substantive rules. The court took note that the FTC explicitly disclaimed rulemaking authority under Section 6(g) for its first 48 years of existence. While the FTC issued several substantive rules under Section 6(g) between 1962 and 1978, it has not promulgated any substantive rules since that time, other than the non-compete rule.
  
  
• APA Challenge: As an alternative ground for Plaintiffs’ likely success on the merits, the court found a “substantial likelihood” that the Rule is arbitrary and capricious in violation of the APA because it is unreasonably overbroad without sufficient supporting evidence: “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.’” The court noted a “lack of evidence as to why [the FTC] chose to impose such a sweeping prohibition . . . instead of targeting specific, harmful non-competes.” According to the court, the FTC failed to conduct an analysis of potential alternatives to the ban or consider “the substantial body of evidence supporting these agreements.”
  
  
• Additional Elements of PI Standard: According to the court, the additional elements of the preliminary injunction standard also have been satisfied: Plaintiffs would be irreparably harmed if the non-compete ban were to be put into effect, and the balance of equities and public interest favor an injunction.
  
  
• Scope of Relief: The court limited the scope of the injunction to Ryan and four business associations that had successfully intervened in the case but declined to issue a nationwide injunction. In addition, while the injunction applies to the intervenors, including the US Chamber of Commerce, Business Roundtable, Texas Association of Business, and Longview Chamber of Commerce, it does not extend to the members of those business associations.

Looking Ahead

The Ryan decision does not bode well for the Rule. The court intends to rule on the merits of Ryan’s challenge by August 30, and the court’s extensive analysis of the suit’s likelihood of success on the merits indicates that it is likely to grant permanent relief. The court may also broaden the scope of relief, potentially broadening the injunction to include the business associations’ members, or vacating the Rule entirely. Under the APA, a reviewing court “shall . . . set aside” an unlawful agency action. Recent Fifth Circuit precedent holds that the “default” remedy for unlawful agency action is to vacate the rule: “setting aside” agency action has “nationwide effect,” is “not party-restricted,” and “affects persons in all judicial districts equally.” Braidwood Management, Inc. v. Becerra, 104 F.4th 930, 951 (5th Cir. 2024); see also Career Colleges & Schools of Texas v. United States Dept. of Education, 98 F.4th 220, 255 (5th Cir. 2024) (the APA authorizes the same scope of remedies for preliminary relief).

This case is the first of several that were filed within hours of the FTC’s issuance of the Rule earlier this year. A separate suit is pending in federal district court in Pennsylvania, with a ruling expected by July 23. At a hearing on July 10, the court asked detailed questions about the FTC’s authority to promulgate rules on unfair methods of competition and whether the Plaintiff is likely to suffer irreparable harm if the Rule were to take effect as scheduled. Regardless of the outcome, both cases are likely to be appealed to the Fifth and Third circuits, respectively, and inconsistent rulings may lead to Supreme Court review.

Importantly, regardless of the fate of the Rule, the FTC continues to have the ability to challenge non-compete agreements on a case-by-case basis. The agency has filed several such challenges in recent years. And, of course, state laws governing non-compete agreements continue to apply.

*          *          *

O’Melveny’s Antitrust & Competition and Labor & Employment teams continue to track developments as the law on non-competes evolves. For any questions related to the rule or non-compete issues, please contact the O’Melveny lawyer whom you work with or one of our Key Contacts.

This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. Julia Schiller, an O’Melveny partner licensed to practice law in the District of Columbia, New Jersey, and New York; Anna T. Pletcher, an O’Melveny partner licensed to practice law in California; Eric Amdursky, an O’Melveny partner licensed to practice law in California; Kim Williams, an O’Melveny partner licensed to practice law in Texas; Monsura A. Sirajee, an O’Melveny counsel licensed to practice law in the District of Columbia and California; Mike Rosenblatt, an O’Melveny associate licensed to practice law in the District of Columbia; and Casey Kovarik, an O’Melveny associate licensed to practice law in California, contributed to the content of this newsletter. The views expressed in this newsletter are the views of the authors except as otherwise noted.

 © 2024 O’Melveny & Myers LLP. All Rights Reserved. Portions of this communication may contain attorney advertising. Prior results do not guarantee a similar outcome. Please direct all inquiries regarding New York’s Rules of Professional Conduct to O’Melveny & Myers LLP, 1301 Avenue of the Americas, Suite 1700, New York, NY, 10019, T: +1 212 326 2000.