Northern District of Texas Temporarily Enjoins Federal Trade Commission's Noncompete Rule

July 5, 2024

Click for PDF

In Ryan, LLC v. Federal Trade CommissionThe Northern District of Texas concluded The role of an administrative agency is to do what Congress tells it to do, not to do what the agency thinks.[s] That should do the trick.

On July 3, 2024, the United States District Court for the Northern District of Texas found that the Federal Trade Commission’s non-compete rule, which would retroactively invalidate more than 30 million employment contracts and preempt the laws of 46 states, exceeds the FTC’s statutory authority and is arbitrary and capricious in violation of the Administrative Procedure Act. The court temporarily enjoined the rule’s enforcement and stayed its effective date, but limited the scope of relief to the parties to the case. The court did not issue a nationwide preliminary injunction.

Background

Section 5 of the FTC Act authorizes the FTC to prevent unfair competitive practices through case-by-case adjudication. Section 6(g) of the Act grants the FTC ancillary powers to support administrative adjudication, including the power to make recommendations, issue reports, classify firms, and establish rules and regulations to implement the provisions of this subchapter.

On April 23, the FTC promulgated the Noncompete Rule by a vote of 3-2. The rule invokes the FTC’s presumptive authority under Sections 5 and 6 and declares that virtually all employer-employee noncompete agreements are unfair methods of competition. The rule therefore prohibits companies from entering into new noncompete agreements, except those associated with the sale of certain business interests, and prohibits the enforcement of virtually all noncompete agreements (with rare exceptions for the sale of certain business interests and for agreements with certain senior executives). The rule also expressly preempted the laws of the 46 states that permit noncompete agreements.

Ryan, LLC, is a global tax consulting firm headquartered in Dallas. Its principals and associates are highly sought-after tax experts, many of whom agree to limited-term non-compete agreements.

Represented by Gibson Dunn, Ryan filed suit against the FTC in the Northern District of Texas, alleging that the noncompete rule exceeds the FTC’s statutory authority, violates the Administrative Procedure Act, and defies the major questions doctrine, which states that federal agencies cannot regulate matters of profound economic and political importance without clear authorization from Congress. A group of trade associations led by the U.S. Chamber of Commerce intervened in the case to also challenge the rule.

The opinion of the courts

• The Court held that the non-compete rule exceeded the scope of the FTC's statutory authority. On its face, Section 6(g) of the Act does not expressly grant the Commission authority to promulgate substantive rules regarding unfair methods of competition. The Court noted that, unlike Section 5, Section 6(g) contains no penalty provision, indicating a lack of force of law. In addition, the Court noted that the location of the presumed substantive rulemaking authority is suspect…. Section 6(g) is the seventh in a list of twelve powers that are almost entirely investigatory.
• The court also found that the non-compete rule was arbitrary and capricious, in violation of the Administrative Procedure Act. First, the rule is unreasonably broad without reasonable explanation. The FTC is failing[ed] …evidence of why it chose to impose such a sweeping ban, which prohibits the entering into or enforcement of virtually all non-compete clauses, instead of targeting specific, harmful non-compete clauses. Second, the FTC failed to adequately consider the alternatives to issuing the rule. It dismissed every possible alternative, concluding simply that either the pro-competitive rationale outweighed the harms or that employers had other means of protecting their interests.
• The Court did not address the major questions doctrine.
• The court determined that Ryan and the interveners would suffer irreparable harm if the rule went into effect, as they would face financial harm and unrecoverable costs. [when] comply with the rule.
• The court declined to issue a nationwide preliminary injunction. The preliminary injunction and stay are limited to Ryan and the intervenors, and do not extend to the intervenors' member companies or other third parties.

What this means:

• The noncompete rule was set to go into effect on September 4. While the preliminary injunction and stay are in effect, the FTC cannot enforce the rule against Ryan or the speakers. Their existing noncompete agreements remain enforceable under federal law, and they are free to enter into new noncompete agreements.
• Absent nationwide relief, the rule will go into effect on September 4 for all other employers, meaning state non-compete laws will be preempted, existing non-compete agreements will be retroactively invalidated, and companies will be barred from entering into new non-compete agreements unrelated to certain business sales.
• The decision does not constitute a binding precedent for other courts.
• The proceedings before the district court will continue. The court has indicated that it will render its final decision on the merits by August 30.

Gibson Dunn attorneys Eugene Scalia, Allyson N. Ho, Amir C. Tayrani, Andrew Kilberg, Elizabeth A. Kiernan, Aaron Hauptman and Josh Zuckerman represent Ryan, LLC.

The following Gibson Dunn attorneys prepared this update: Eugene Scalia, Allyson N. Ho, Amir C. Tayrani, Andrew Kilberg, Elizabeth A. Kiernan, Aaron Hauptman, and Josh Zuckerman.

Gibson Dunn attorneys are available to answer any questions you may have regarding the topics discussed in this update. Please contact your regular Gibson Dunn attorney, the authors, or any leader or member of the firm’s Appellate and Constitutional Law, Labor and Employment Law, Administrative and Regulatory Law, or Antitrust and Competition Law practice groups:

Right of appeal and constitutional law:
Thomas H. Dupree Jr. Washington, DC (+1 202.955.8547, [email protected])
Allyson N. Ho Dallas (+1 214.698.3233, [email protected])
Julian W. Poon Los Angeles (+ 213.229.7758, [email protected])

Work and employment:
Andrew GI Kilberg Washington, DC (+1 202.887.3759, [email protected])
Karl G. Nelson Dallas (+1 214.698.3203, [email protected])
Jason C. Schwartz Washington, DC (+1 202.955.8242, [email protected])
Katherine VA Smith Los Angeles (+1 213.229.7107, [email protected])

Administrative and regulatory law:
Eugene Scalia Washington, DC (+1 202.955.8673, [email protected])
Helgi C. Walker Washington, DC (+1 202.887.3599, [email protected])

Antitrust and competition:
Rachel S. Brass San Francisco (+1 415.393.8293, [email protected])
Svetlana S. Gans Washington, DC (+1 202.955.8657, [email protected])
Cynthia Richman Washington, DC (+1 202.955.8234, [email protected])
Stephen Weissman Washington, DC (+1 202.955.8678, [email protected])

2024 Gibson, Dunn & Crutcher LLP. All rights reserved. For contact information and other information, please visit us at www.gibsondunn.com.

Attorney Advertising: These materials have been prepared for general information purposes only based on information available at the time of publication and are not intended to be relied upon as, nor should they be relied upon as, legal advice or a legal opinion on any specific facts or circumstances. Gibson Dunn (and its affiliates, attorneys and employees) assume no liability in connection with the use of these materials. Sharing of these materials does not establish an attorney-client relationship with the recipient and should not be considered an alternative to the advice of a qualified attorney. Please note that facts and circumstances may vary and prior results do not guarantee a similar outcome.