Federal Texas Court Sets Aside with “Nationwide Effect” the FTC Rule Banning Non-Competes

Once again surprising the country by acting ten days before her own self-appointed deadline, a federal judge in the United States District Court for the Northern District of Texas issued a ruling on August 20 in the Ryan v. FTC case setting aside the FTC Rule banning non-competes, and held (quoting Fifth Circuit precedent) that the ruling had “nationwide effect” that is “not party restricted” and “affects persons in all judicial districts equally.” This will undoubtedly elicit an immediate appeal from the FTC.

The Court’s reasoning is almost word-for-word identical to its Order staying the FTC Rule on July 3, 2024 (which we analyzed here).  The Court once again limited its ruling to conclude that the FTC violated the APA because “[1] the FTC exceeded its statutory authority in implementing the Rule, and [2] the Rule is arbitrary and capricious.”

Regarding the statutory authority, the Court once again ruled that “the text, structure, and history of the FTC Act reveal that the FTC lacks substantive rulemaking authority with respect to unfair methods of competition under Section 6(g),” which is the section of the FTC Act that the FTC relied on for promulgating the rule.  While the Court concluded “the FTC has some authority to promulgate rules to preclude unfair methods of competition,” it nonetheless held that Section 6(g) is “a ‘housekeeping statute,’ authorizing what the APA terms ‘rules of agency organization procedure or practice’ as opposed to ‘substantive rules.’”  The Court also agreed that “the lack of a statutory penalty for violating rules promulgated under Section 6(g) demonstrates its lack of substantive rulemaking power.”  Finally, the Court found that “viewing the statute as a whole, the location of the alleged substantive rulemaking authority is suspect”, as it would mean “Congress did not choose to place such substantial power in a primary, independent place.”

The Court also found once again that the Rule is “arbitrary and capricious because it is unreasonably overbroad without a reasonable explanation. 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.”  Specifically, the Court held that the Rule: (1) inadequately relies on a handful of studies which compare inapposite state approaches, and, (2) is broader than any previously enacted state rule.  In addition, Court held that the FTC failed to sufficiently address less-disruptive alternatives to the Rule or whether reliance interests may outweigh its policy concerns.  The Court also held the FTC failed to consider the pro-competitive justifications for non-competes.

The Court once again did not address arguments about whether the Rule is invalid because it represents a “Major Question” or runs afoul of the “Non-Delegation Doctrine,” two constitutional rules of interpretation that the opponents of the Rule raised in their briefing.  There is also no further discussion of retroactivity or any other subsidiary argument raised by the parties. 

The primary change from the preliminary stay ruling in the Court’s Order is the final relief.  Because the parties are at summary judgment, the Court ruled that it was obligated to “set aside” the unlawful Rule:

The text of the APA means what it says.” [Loper Bright Enters. v. Raimondo, 144 S. Ct. 2244, 2262 (2024)]. Having concluded that (i) the FTC promulgated the Non-Compete Rule in excess of its statutory authority, and (ii) the Rule is arbitrary and capricious, the Court must “hold unlawful” and “set aside” the FTC’s Rule as required under § 706(2). As to the FTC’s argument that relief should be limited to the named Plaintiffs—the APA does not contemplate party-specific relief. See generally 5 U.S.C. § 706(2).

“As [the Fifth Circuit] put it in a couple of recent cases, setting aside agency action under § 706 has ‘nationwide effect,’ is ‘not party-restricted,’ and ‘affects persons in all judicial districts equally.’”

Braidwood Mgmt., Inc. v. Becerra, 104 F.4th 930, 951 (5th Cir. 2024) (internal citations omitted). Thus, the Court hereby holds unlawful and sets aside the Rule. See 16 C.F.R. § 910.1–.6.14 The Rule shall not be enforced or otherwise take effect on its effective date of September 4, 2024, or thereafter. See 16 C.F.R. § 910.1–.6.

The Court’s language that the Rule “shall not be enforced or otherwise takes effect” provides further clarity for businesses wondering what they should do on September 4 and likely protects businesses and employees from an aggressive FTC that might consider action not in full compliance with the Order.

Even as this case comes to a close at the district court level (and will likely go on appeal), two other district court cases challenging the FTC Rule remain.  As previously reported, the court in ATS Trees v. FTC in the Eastern District of Pennsylvania has upheld the FTC’s authority to issue the Rule but did so only at the preliminary injunction stage.  Meanwhile, the court in Properties of the Villages v. FTC in the Middle District of Florida held the FTC lacked the authority to promulgate the Rule, finding the FTC violated the Major Questions doctrine, as discussed here.

Arguably this district court’s ruling in Ryan v. FTC with its “nationwide effect” should prevent any further conflicting rulings, at least until the Fifth Circuit weighs in.  Whether the other district courts honor this ruling, however, remains to be seen.