FTC’s Non-Compete Ban Temporarily Stayed on Limited Basis

 A Texas federal district court issued its promised decision on July 3, temporarily staying the FTC’s Non-Compete Rule (Rule) in Ryan LLC v. Federal Trade Commission as applied to the Plaintiff and the Plaintiff-Intervenor organizations¹ only. The opinion previews how the court is likely to rule on the merits, which it has promised to do by August 30, prior to the Rule’s effective date of September 4. Notably, in addition to not reaching non-Plaintiffs, the court declined to issue a preliminary injunction that extended to the members of the U.S. Chamber of Commerce or the three other business organizations in the case.

The Decision

The court’s decision granted the Plaintiffs’ request for a preliminary injunction of the Rule pending a decision on the merits. In granting the preliminary injunction, the court held that the Plaintiffs were likely to show that the Rule violates the Administrative Procedures Act (APA)² because both 1) the FTC exceeded its statutory authority and 2) the Rule is arbitrary and capricious. The court also found that Plaintiffs would be irreparably harmed by complying with the (likely) invalid Rule, and that the public interest and balancing of the equities favored a preliminary injunction.

Exceeded Statutory Authority

Repeatedly invoking the direction from National Petroleum³ that the “question to be answered is not what the Commission thinks it should do but what Congress has said it can do,” the court briefly examined the history of the FTC and the FTC Act. The court narrowed the issue on statutory authority to whether Section 6(g) of the FTC Act and the Magnuson-Moss Warranty Act allows the FTC to promulgate substantive rules regarding unfair methods of competition.

Section 6(g) of the FTC Act gives the FTC the power “to make rules and regulations for the purpose of carrying out the provisions [of the FTC Act].” The Magnuson-Moss Warranty Act, among other things, empowers the FTC to make “interpretive rules and general statements of policy with respect to unfair or deceptive acts or practices in or affecting commerce.” Although the court stated that the FTC has “some authority” to make rules to “preclude unfair methods of competition” (but without describing what such rules would be), it held that, even with the Magnuson-Moss Warranty Act, Section 6(g) is “a housekeeping statute” and authorizes the FTC to issue only rules of procedure or practice, not of substance. If this “housekeeping” language, or something similar, is included in the merits opinion, the FTC may have difficulty promulgating any substantive rule in the future.   

Arbitrary and Capricious

Separately, the court found that the Rule was arbitrary and capricious in violation of the APA. Specifically, the court stated that “there is a substantial likelihood the Rule is arbitrary and capricious because it is unreasonably overbroad without a reasonable explanation.” The court faulted the FTC’s reliance on only “a handful of studies” on the effects of non-compete agreements and stated that the FTC’s categorical ban on non-compete agreements lacked an evidentiary foundation or a reasonable basis. The court also criticized the FTC for ignoring the positive benefits of non-compete agreements and disregarding evidence supporting such agreements. Further, the court rebuked the FTC for failing to sufficiently address less restrictive alternatives to a complete ban on non-compete agreements, stating that the record showed the FTC did not conduct any analysis on alternatives and simply dismissed possible alternatives.

Irreparable Harm, Balancing the Equities, and Public Interest

The court next considered the sources of irreparable harm identified by Plaintiffs, as well as the FTC’s “scant” opposing argument that Plaintiffs’ harm derived from mere litigation expense or was self-inflicted. The court sided again with Plaintiffs, finding a cognizable financial injury associated with compliance, noting the lack of any guarantee of eventual recovery to further underscore the irreparable nature of the harm.

Balancing the equities and the public interest factors of the analysis merge when the government is the opposing party. The court concluded that the status quo would be preserved with a preliminary injunction and, in the absence of one, the injury “to both Plaintiffs and the public interest would be great.”

Impact of Loper Bright?

The court did not use either Chevron or Loper Bright to analyze whether to grant the preliminary injunction to stop the Rule from going into effect. This may be because the FTC did not rely on Chevron in its briefing to support the Rule – relying instead on statutory authority. Under Chevron, an administrative agency charged with implementing a federal statute would “fill the gap” in the reading of ambiguous laws and courts were required to defer to that administrative agency’s interpretation. The Supreme Court’s recent decision in Loper Bright Enterprises v. Raimondo⁴ holds that judges are still allowed to consider a federal agency’s interpretation of a statute, but are no longer required to do so. The court cites Loper Bright once, only in passing. But, the court seems to adopt the general premise of Loper Bright by stating that “The judiciary remains the final authority with respect to questions of statutory construction and must reject administrative agency actions which exceed the agency’s statutory mandate or frustrate congressional intent.”

Scope of Injunctive Relief

Perhaps the most interesting piece of the decision is that the preliminary injunction applies only to the Plaintiffs – Ryan LLC, the U.S. Chamber of Commerce, and the three other named business associations. The court reviewed Fifth Circuit cases and concluded that this case was not an “appropriate circumstance” to grant nationwide relief. The court further explained that none of the Plaintiffs offered briefing to support a nationwide injunction. As to the Association Plaintiffs, the court similarly noted that although it appeared that the Associations wanted associational standing on behalf of their members, they did not brief associational standing, and the court declined to extend the injunction to the associations’ members. As such, this decision does not immediately benefit others with respect to the Rule, but its tone, content, and timing of the promised August 30 decision (prior to the September 4 effective date) likely foreshadows a broader ruling to come.

What’s Next

The court has promised a decision on the merits of the Rule by August 30. But, the July 3 decision signals that the court may issue a permanent injunction that prevents the FTC from enforcing the Rule in the future more broadly than just against the named Plaintiffs. The court all but invited the Plaintiffs to brief the issue of associational standing and nationwide application of a decision, thus expect to see supplemental briefings on these issues. Businesses should also expect the FTC to appeal the court’s decision, either as to the preliminary injunction or following the decision on the merits. These appeals could also delay the September 4 effective date of the Rule.  

In addition, there is a separate case pending in the Eastern District of Pennsylvania challenging the Rule brought by ATS Tree Services LLC. A hearing on that motion for a preliminary injunction is scheduled for July 10 but there is no timetable for a preliminary injunction decision or a decision on the merits. Even though ATS filed a notice of supplemental authority citing the Texas court’s decision, the Eastern District of Pennsylvania is not required to follow the Texas court’s ruling or reasoning and could reach an entirely different conclusion regarding whether ATS is entitled to a preliminary injunction and/or provide a different scope of relief than that awarded in Ryan. It appears, however, that a nationwide injunction was similarly not briefed by the parties in the ATS case.

What Should Businesses Do Now

What happens on September 4 is still, unfortunately, up in the air. It seems likely the Texas court will hold that the Rule violates the APA and is unenforceable. But, whether that ruling would be enforceable only as to the Plaintiffs or nationwide is an open question. Regardless, as we have said previously, the FTC can still challenge overbroad non-compete agreements as it has done in the past. In addition, even in states that permit non-compete agreements in some form, aggressive Attorneys General can challenge overbroad non-compete agreements using the state’s antitrust and consumer protection statutes.

Thus, businesses should be analyzing with their legal team the extent to which their non-compete agreements with current and former employees are narrowly tailored to protect legitimate business interests. For example, companies should consider whether there are alternatives to protecting their trade secrets and intellectual property. A comprehensive program involving protection of trade secret, confidential information and intellectual property involves not only proper agreements and policies, but also training, reminders and systems for such protections.

In parallel, companies should carefully audit their trade secret policies to assess the integrity of these programs – both with and without the availability of non-competes. One key ingredient of a robust trade secret policy is a properly tailored confidentiality agreement. Likewise, documented exit interviews not only provide a useful reminder to departing employees about ongoing obligations with respect to a company’s valuable confidential information, they can provide powerful evidence in a subsequent trade secret lawsuit that the company engaged in reasonable protective measures.

Buchanan’s team of multidisciplinary attorneys stands ready to provide counseling on the various issues implicated by the FTC’s ban on non-compete agreements, whether from an employment or intellectual property perspective.

For more information on the recent decision, Buchanan will be having webinar CLE programs on July 10 and July 24, and you can register here.