Ryan LLC v. FTC  is one of several lawsuits challenging the Federal Trade Commission (FTC’s) Non-Compete Ban. The Non-Compete Ban, which the FTC issued on April 23, 2024, determined that non-compete agreements entered by employers with workers are an unfair method of competition, and therefore a violation of Section 5 of the FTC Act.  Last week, the U.S. District Court for the Northern District of Texas granted a preliminary injunction postponing application of the Ban as applied to the plaintiffs in Ryan. The plaintiffs are Ryan LLC, the Chamber of Commerce of the United States, and various other organizations who intervened in the lawsuit. The district court concluded that the FTC lacks substantive rule making authority under Section 6(g) of the FTC Act, and so lacks authority to unilaterally determine that noncompetes violate Section 5; and that the Ban is “arbitrary and capricious,”  and so is unauthorized under the Administrative Procedure Act (APA). The court intends to enter a merits disposition “on or before August 30, 2024.” 

The court’s arbitrary and capricious discussion is particularly interesting. The court pointed out that the FTC’s ban goes farther than any other state (p. 21), and that the FTC did not consider less sweeping alternatives, “merely concluding that either the pro-competitive justifications outweighed the harms” or noncompetes, or that employers had other avenues to protect their interests.”  (p. 23).  No other state, even California, has a ban that is quite as sweeping as the FTC’s. The FTC’s ban would apply not just to noncompetes, but also to broad confidentiality agreements or other workplace contracts that have the effect of a noncompete.

The court’s order currently applies only to the plaintiffs in this case. However, when the court makes its final ruling in August, the court could enjoin the FTC from enforcing the Non-Compete Ban against anyone. In other words, the court could issue a nationwide injunction blocking enforcement of the Ban.  The APA permits courts to grant injunctions against federal agencies that act arbitrarily, capriciously, or contrary to law. The FTC would likely appeal such an injunction to the United States Court of Appeals for the Fifth Circuit. If the Fifth Circuit affirms, then the FTC would presumably petition the Supreme Court for a writ of certiorari.  Given the case’s implications for national noncompete policy and federal administrative law, the Supreme Court would probably grant certiorari.

The timing is not good for the FTC. The Supreme Court’s recent holding in Loper Bright Enterprises v. Raimondo substantially weakened agency’s power to interpret their authorizing statutes.  Prior to Loper, courts would have applied “Chevron deference,” deferring to the Commission’s interpretation of an (ambiguous) statute, so long as the Commission’s interpretation was reasonable. The FTC’s view that Section 6(g) of the FTC Act authorizes the Commission to make noncompete agreements an unfair method of competition was (in my view) at least “reasonable.”  Section 6(g) says that the Commission has “power… to make rules and regulations for the purpose of carrying out the provisions of this subchapter.”  Chevron deference probably would have applied. But post-Loper courts apparently do not automatically defer to the FTC’s interpretation of its statutory authority. Instead, they conduct a de novo review of the statute, independently determining its meaning without giving weight to the agency’s interpretation. This is exactly what the district court did in Ryan, and in fact the court cited to the Court’s opinion in Loper (p. 13).  I thought that the FTC was taking a risk passing such a sweeping new rule, even before Loper. Now things look even bleaker for the Ban.

Posted by Camilla A. Hrdy

View post with links to cases here: https://sites.rutgers.edu/camilla-hrdy/texas-court-enjoins-ftc-ban-on-noncompetes/