Employers that rely on non-compete agreements to protect their trade secrets and other legitimate business interests got some welcome news on August 20. The Federal Trade Commission’s (FTC) final non-compete rule, which seeks to prohibit the use of most non-compete agreements and require employers to issue non-enforcement notices stating that such agreements cannot be lawfully enforced, has been set aside and will not be enforced or otherwise take effect on September 4 as scheduled.  

The Court’s Memorandum Opinion and Order

The U.S. District Court for the Northern District of Texas in Ryan, LLC v. Federal Trade Commission concluded that the plaintiffs in the case were entitled to summary judgment on all of their claims under the Administrative Procedure Act (APA) and the Declaratory Judgment Act because “the FTC lacks statutory authority to promulgate the Non-Compete Rule, and…the Rule is arbitrary and capricious.”

This ruling blocks the enforcement of the non-compete rule generally, on a national basis and for all employers, not only the plaintiffs in the case. The court’s opinion is clear:

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.’” [citation omitted and emphasis added].

Setting the rule aside under the APA means that the rule will not take effect and cannot be enforced on a nationwide basis.

The court rejected the FTC’s arguments regarding the scope of its authority to issue the rule, noting that “the text and the structure of the FTC Act reveal the FTC lacks substantive rulemaking authority with respect to unfair methods of competition, under Section 6(g).” In its reasoning, the court pointed out that “[t]he role of an administrative agency is to do as told by Congress, not to do what the agency thinks it should do.”

While the lack of statutory authority was sufficient basis alone to set aside the rule, the court did not stop there. In analyzing the FTC’s justification for issuing the rule, the court went on to conclude that even if the FTC had authority to issue the rule, the rule is unreasonably overbroad without a reasonable explanation. The court explained that the FTC had failed to justify the extremely broad scope and gravity of the rule:

The Commission’s lack of evidence as to why they chose to impose such a sweeping prohibition—that prohibits entering or enforcing virtually all non-competes—instead of targeting specific, harmful non-competes, renders the Rule arbitrary and capricious. [citations omitted]. In sum, the Rule is based on inconsistent and flawed empirical evidence, fails to consider the positive benefits of non-compete agreements, and disregards the substantial body of evidence supporting these agreements.

For these reasons, the court held that the FTC’s promulgation of the rule constitutes an unlawful agency action and set the rule aside.

The court’s decision is the second decision in less than a week to find the FTC’s non-compete rule invalid. On August 14, in a decision limited to the plaintiff in the lawsuit, the U.S. District Court for the Middle District of Florida in Properties of the Villages, Inc. v. FTC found the rule to be a violation of the major questions doctrine, providing yet a third basis for setting aside the rule beyond the two bases identified in the court’s decision in Ryan, LLC.

Onward and Upward… to the Appellate Courts?

It is likely the FTC will appeal the court’s decision to the U.S. Court of Appeals for the Fifth Circuit and, if necessary, the U.S. Supreme Court. Importantly, the FTC may also seek a stay of the effect of the court’s order pending all such appeals. How the timing and results of any challenges of this nature will play out waits to be seen, but for now employers have some additional breathing room to evaluate and engage in proactive contingency planning around the FTC’s non-compete rule.